While clients are always responsible for determining the status of an engagement, there are certain things recruiters can do to make their client’s lives a bit easier.
Due to the IR35 changes that came into force in April 2021, the end client (decision-maker) is responsible for determining the IR35 status of contractors they engage. A Status Determination Statement (SDS) is merely a written statement put together by the end client stating the employment status of a contractor, following an IR35 assessment conducted with reasonable care. It’s important to note that even if clients pass their SDS obligations to another party, they still remain responsible for the validity of an SDS.
Four ways recruiters can help with IR35
1. Help companies understand the legislation and their obligations
Though it is likely that by now most medium and large sized clients are on a first-name basis with the legislation, smaller clients may need some additional support. Having someone (either in-house or having access to an independent advisor) with practical knowledge of IR35 to explain the legislation and its effects on the business, will go a long way. Clients will need to be aware of the small company exemption and also monitor the size of their company so as to be aware of when exemptions may no longer apply.
2. Ensure a robust SDS process is in place
Whether the client carries out the SDS themselves, or whether they prefer to outsource this, it is important that the process is robust. The client will need to be able to show that they took reasonable care in their decision making. While reasonable care may look different for different sized clients – with differing levels of resource available to tackle this task – at the very minimum, the contracts and working practices have to be reviewed.
The SDS document itself should include the reasoning for the conclusion so that if the contractor disagrees with the conclusion, they are able to respond in detail.
Recruiters should be educating their clients on the use of CEST and the risks of relying solely on CEST output. While it can be used as an aid in considering working practices, it is important that the accompanying guidance is followed. HMRC will not stand by results where the guidance has not been followed, or where facts have been omitted or falsified.
It may be appropriate to use a third-party tool. Without taking away from CEST, providers (such as Markel) who specialise in IR35 offer tools which consider the key tests in more detail and can automatically produce SDS documents ready for approval and sending on. As well as taking away admin, this can help to demonstrate that reasonable care has been taken.
3. Challenge blanket determinations
Following on from the SDS, recruiters should challenge blanket decisions. As the party financially liable for incorrect assessments, it is in your interest to promote the fact that blanket decisions are not considered by HMRC as taking reasonable care.
While blanket ‘inside’ determinations are unlikely to elicit HMRC attention, these are the most likely to encourage workers to look for engagements elsewhere. The best contractors will want to work on an ‘outside’ basis, so if the client’s priority is quality resource they will need to engage with the legislation. Having tools and expert advice available may be the best way to give wary clients the confidence to engage with PSCs.
Recruiters have the ability to influence the terms of both the upper and lower-level contracts. It should be encouraged that where unhelpful terms have been identified these are negotiated out of the contract. HMRC will place a great deal of weight on the contract should they ever question employment status, so a strong contract is your first line of defence.
Equally, if template contracts are being used, these should be reviewed alongside the working practices to make sure that the two align. If you are the party liable for any taxes due from erroneous determinations, you need to be making sure that the contracts used between you and the client, and you and the worker, adequately address the IR35 tests.
Lastly, the client needs to be aware of the contractual rights of the worker. This might sound painfully obvious, however it is not uncommon to see contracts with perfect substitution and control clauses, but if asked, the client will say that the worker cannot substitute and is subject to control. It is better to be clear from the beginning than to find out only once the worker attempts to exercise their rights that the client does not intend to honour the terms of the contract.
The Contractor Solutions team within Markel Tax has expertise and hands-on experience when dealing with IR35 off-payroll legislation, from consultancy advice to enquiry representation. Recruitment agencies can book a virtual IR35 consultation with a member of the team.Contact us for expert advice