Are you ready for April 2020: The impact IR35 will have on Recruitment Agencies
In 2018’s Autumn Budget the Government announced changes to IR35 in the Private Sector. The change mainly implicates the shift in the responsibility in determining IR35 status from the individual contractor to the agency or end-hirer. The changes will be introduced from April 2020.
Historically, independent contractors have been responsible for evaluating their own IR35 status in respect of each assignment and paying their tax liabilities accordingly. This changed in April 2017 when new rules were introduced into the Public Sector requiring end-hirers to carry out IR35 assessments for each of their off-payroll workers. In 2018’s Autumn Budget it was announced that these changes will also be rolled out into the Private Sector.
The result of the April 2020 changes will mean that the responsibility for determining the IR35 status of the directors of Personal Service Companies (“PSC”) who are engaged by a large or medium sized business (HMRC are intending to use the definition set out in the Companies Act 2006) in the private sector will no longer lie with the contractor. This will become the ultimate responsibility of the end hirer or fee-paying entity. The changes will not affect contractors engaged to provide services to small businesses and they will still be required to assess their own status.
Despite the shift in who makes the determination on the IR35 status, the methods by which employment status is assessed will remain unaffected. If a contractor is considered to be operating outside of IR35 today, they should continue to be outside of IR35 post April 2020. This is encouraging news, as it provides an element of certainty in otherwise uncertain period and the fact that the changes are not coming into force until April 2020 will provide end-hirers with the opportunity to assess their flexible workforce from now until the go-live date.
In determining the IR35 status of off-payroll workers, there will be a responsibility on the end-hirer to exercise “reasonable care” and it is possible that the government could introduce stiff consequences for organisations who adopt a blanket ban approach. Whether they choose to, or not, it is evidently certain that a blanket ban will not be considered to be ‘reasonable care’ and therefore this approach should be avoided at all costs.
The changes mean that as of April 2020, whoever makes payment to the PSC (the fee payer), most likely to be the recruitment business, is responsible for ensuring that the correct tax and national insurance is paid to HMRC.
Consequently, end-hirers and recruitment agencies will need to be comfortable with and have a solid understanding of IR35. They will need to seamlessly liaise with each other in respect of each off-payroll role, in order to ensure that they understand the IR35 status of each off-payroll worker. The implementation or development of clear processes and procedures (either managed internally or with the assistance of external specialist support) will be crucial to ensure that they are reaching accurate IR35 status decisions in respect of each off-payroll worker that they engage. Failure to do so may result in recruitment businesses being hit with hefty tax bills plus interest and severe penalties.
It is fundamental that recruitment agencies use this time leading up to April 2020 to put effective measures in place and to confidently embrace their new obligations. If they fail to do so, they could find themselves faced with serious commercial and financial implications.
Where knowledge and confidence is lacking, end-hirers and recruitment business should strongly consider undertaking training with IR35 specialists in an attempt to educate themselves on how to effectively determine employment status. As not every IR35 status assessment is straightforward, engaging IR35 specialists should be high-up on their priorities.
End-hirers can also consider making use of HMRC’s CEST Tool. It is important to note that CEST has previously received a lot of criticism and its credibility is yet to be cemented. More often than not, CEST has been unable to provide an overall outcome as it is unable to consider contractual documents and it also currently overlooks one of the main employment status indicators; Mutuality of Obligation (‘MOO’). We understand that HMRC are currently developing CEST and are looking to introduce questions around MOO, but whether it can become a robust and trustworthy tool for use in determining employment status remains to be seen.
Whilst HMRC have stated that they will ‘Stand by the result given unless a compliance check finds the information provided isn’t accurate’. This doesn’t completely exonerate end-hirers as HMRC may still come to a different conclusion (as we have seen in recent case law).
Brookson Legal Services have been advising on IR35 since its inception in 2000. It carries out IR35 assessments daily and is often instructed by clients to assist in defending IR35 enquiry cases instigated by HMRC.
Brookson Legal Services supported and continues to support a vast number of Public-Sector clients, including many NHS Trusts and has helped them to successfully navigate the IR35 changes in the Public Sector that were implemented in April 2017. This has enabled it to further enhance the already credible experience it has in advising clients on this intricate piece of legalisation that is now being imposed on organisations who are likely to be unfamiliar with it.
Brookson Legal Services is also regulated by the SRA and it has team members who have experience of sitting on HMRC’s IR35 Forum.
If you are interested in speaking to Brookson Legal Services to understand how your organisation can prepare for the forthcoming changes in April 2020, please do not hesitate to contact a member of the team on:
T – 0345 058 1227