Warning: Agency partners regarding provision of IR35 support services
We are noticing a worrying trend in recruitment agencies offering an IR35 review / Status Determination Statement (SDS) production service to their clients. In our view, recruiters should avoid this activity or at least think very carefully about their processes to ensure the associated risks are managed.
Typically, the service involves the agency procuring an automated SDS production tool, completing it for the contracts they have placed and passing this to the end client to rely on. Often there is an IR35 tax loss insurance policy which stands by the determination to help to mitigate the risk. This is being done in good faith by recruiters to help their clients through the transition to the new off-payroll rules and whilst this is understandable, it comes with considerable risk for both the recruiter and their clients.
The reasonable care risk
The primary risk here is on the client. The off-payroll rules place a very clear obligation on the end client to produce and issue an SDS and in doing so they are required to take reasonable care. This will, as a minimum, involve an assessment of the working practices of the role, together with a review of the relevant contracts in place. It is acceptable, and in many cases, advisable to outsource this review to a suitably qualified specialist. Where the risk arises is if the agency staff member tasked with completing the SDS tool is not an expert in employment status, (which is highly likely) and/or is not involved in the day-to-day operation of the contract and cannot therefore accurately answer the pertinent questions.
It is also likely that a review of the contracts will be omitted from this process and the SDS may be asked to be “signed off” by a representative at the client, who is far removed from the contract in question and the day-to-day working arrangements. The outcome is that HMRC would be likely to find that the client has not fulfilled their obligations under the legislation and not therefore taken “reasonable care.” Should this be the case, the client will become the “deemed employer” under the legislation and will be pursued by HMRC for ALL of the tax and NIC due plus interest and penalties for any inside IR35 roles (and any outside IR35 roles found to be incorrect) even if another party has already deducted the tax and NIC.
Reputational risk and insurances
This presents a significant risk to end clients which has in many cases been inadvertently created by a service being offered in good faith by the recruiter. The reputational damage should this situation arise will be significant for the recruiter, and whilst comfort could be taken via a tax loss insurance policy it is unlikely that an insurer would stand by a claim in the event where a recruiter, albeit unwittingly, had inputted incorrect information into an SDS tool. It is also difficult to imagine an insurer accepting the risk where the process has failed to consider the contracts when producing an SDS for their client.
A further risk for recruiters offering this service to their clients arises from them providing what is effectively tax advice by offering opinion on employment status or the service of producing a status determination statement. Recruiters should check their PI cover to ensure that they are insured for this type of work and consider the engagement terms they enter into with their clients. They should also review the contracts they hold with the SDS production tool provider to ensure they hold appropriate PI cover which can be relied upon in the event of liabilities arising.
A further point to note, which could ultimately be the biggest sting in the tail here is the impact of the MSC legislation. Following the introduction of these rules in 2007 recruiters have been particularly careful to steer clear of providing any advisory services which fall outside of the agency exemption contained in the MSC rules. Providing a service related to IR35 or employment status assessments is likely to be considered as falling outside of the agency exemption and therefore could bring the MSC rules into consideration.
Senior Accounting Officer (SAO) Risk
For larger businesses (end clients and recruiters) affected by the SAO reporting rules, there is an additional risk that the business has not:
- properly managed its risks
- appropriately managed the implementation of a new system
- ensured that appropriate training has been given and
- obtained the necessary facts to make judgements.
This can result in personal financial penalties for the SAO and corporate penalties for the business.
In summary, whilst it may seem to be added value to a client or a client may request you to provide them with an SDS, it brings you and them considerable risk.
Sue Ollerenshaw, a former HMRC PAYE auditor with extensive employment taxes experience, comments “Brookson have correctly identified the potential dangers of concentrating solely on IR35/the Off payroll working rules and forgetting other relevant legislation. The market tends to have a short-term memory and we are seeing a lot of schemes being marketed as “IR35 Proof”, some of which present other risks.” Sue can help your clients to understand and minimise their risks.
Paul Chamberlain, Head of Employment at JMW Solicitors who works closely with REC, TEAM, APSCo, ALP and FCSA, commented that “It is important for agencies to understand the broad range of risk factors which present themselves should they consider providing outsourced IR35 services to their clients. Whilst in the short term it may be welcomed as a value add from the client it is essential that these, perhaps unforeseen, risks are evaluated and managed before proceeding”. JMW Solicitors have an experienced team who would be happy to assist you with educating your clients and drafting the necessary contracts and procedures to avoid some of these issues”.
Remember, it is the client’s obligations to get IR35 right. Many need support to do this and they should be seeking advice from a suitably qualified professional, experienced in undertaking employment status assessments and providing hands-on consultancy and project management services. Please contact your account manager for advice on how Brookson Legal Services can assist your client with the off-payroll rules in a way that eliminates all of these risk factors.
Original source: The Recruiter