Supply Chain Compliance – End Hirer Risks
To help you understand the entities included in your supply chain and the risks associated with them that could affect you as the hirer, we have put together the following infographic and blog.
Many hirers think that once their IR35 audits have been completed they are compliant in the eyes of HMRC. Unfortunately, this isn’t the case. All areas within the supply chain provide different risks for the hirer, meaning they need to have full visibility from the get-go otherwise any potential fines or penalties can travel up the supply chain and put the hirer at risk.
What are the risks that could affect the hirer?
To give you a better understanding of the risks that could affect you as the hirer, we have split out each area of the supply chain and identified what you need to be aware of.
Contractor – Inside IR35
As you will be aware, in the majority of cases the contractor is no longer responsible for assessing their own IR35 status since April 2021, but they will likely be responsible for choosing a payroll provider (which may constitute the fee payer for the purpose of the IR35 legislation) to process their wages. Unfortunately, if the contractor is engaging with a company providing a non-compliant PAYE model (Pay as you earn) they won’t be paying the right levels of tax or National Insurance contributions. Initially, you would look at this and think if HMRC were to open an investigation the fee payer would be liable for fines, but this isn’t always the case. If either the fee payer goes into liquidation, ceases trading or is unable to pay the fines the liability could travel up the supply chain and end up being the hirer’s responsibility.
This is the same with any contractors who are being paid below minimum wage. If after tax and NI the contract worker is found to be being paid less than the national minimum wage rate, the hirer could be held responsible.
Contractor – Outside IR35
In the case where a contractor is outside IR35, the hirer can be held responsible if the recruiter engages with a contractor incorrectly. An example of this would be you providing the contractor with an outside SDS (based on the intended working practices) but then the recruiter engaging with them on an unsuitable contract e.g providing them with a temporary worker contract, subject to PAYE deductions rather than a suitable contract for services contract, this could undermine the SDS you have provided. This could then make your IR35 determination inaccurate and you as the hirer could be liable for the unpaid employment taxes.
At times, the fee payer may be the recruitment agency, but this isn’t always the case. The responsibility of the fee payer is to ensure the contractor is paid compliantly. If the fee payer is not deducting and reporting the right amount of tax and NI, they can be fined by HMRC. As the fee payer sits within the supply chain the hirer needs to ensure that they are doing their role correctly and that they have sufficient financial standing to ensure the liabilities can be paid. If HMRC were to open an investigation and challenge the fee payer, the fee payer may realise how big of a cost this is for their business and decide to cease trading. If this happened the liability would travel back up the supply chain, meaning the hirer is left to pay the outstanding liabilities. We have seen a lot of news coverage relating to non-compliant umbrella companies, this reiterates how important it is for you to do checks to ensure everyone you work with is complying with the rules.
There are instances where a recruitment agency is utilised by a client to solely source labour for the client but does not contract with or pay the contractor. They form an integral part of the supply chain as they should attach the Client’s SDS to the vacancy advertisement. This allows potential candidates to make an informed decision on whether to apply for a role and if they do, whether they will be engaged on an Inside or Outside IR35 basis. This in turn will save you time and money as you are being transparent with the potential contractors, meaning only those who are happy with the IR35 status will apply for the role.
Supplier (Contracted-out services)
In this instance, a supplier could be a business you engage with that is providing a service to you. A contracted-out service is where one business procures services from another business which is responsible for the complete delivery of the services. Prior to the engagement starting there should be a clear understanding of what services the supplier to providing to you.
A true contracted-out service means the IR35 responsibilities and liabilities are also “contracted-out” to the supplier. Therefore, the original end-hirer (i.e. you) shouldn’t have any liability under IR35 and the supplier becomes the “end hirer” with the IR35 responsibility and liability.
If HMRC were to investigate your business and supply chain and didn’t believe the services from the supplier are truly contracted out, the hirer responsibilities would return to your business. This could cause you a lot of problems as you wouldn’t have completed any audits or reviewed the supplier, meaning you would not be able to demonstrate reasonable care, putting tax liability back on your business.
Outsourcing to a supplier can save your business a lot of time and money, especially if you don’t have the skill set in-house. When doing this you need to make sure you have sight of who and how this work will be completed. For example, the service your supplier is offering to support you with could be further outsourced to another business without you being aware. If HMRC were to look into your supply chain and find that the business completing the work isn’t compliant, this would be a red flag and you could be penalised.
There’s a lot that you need to be aware of when you are the hirer in the supply chain, as well as all the points above you need to consider other legislations such as the Criminal Finance Act, MSC Legislation and Tax Avoidance Schemes.
When speaking to our clients we have found that many are unaware of the true meaning of end-to-end supply chain compliance and didn’t understand the additional risks listed above.