Does IR35 apply to freelancers?
As a freelancer, you’ve probably heard about the IR35 reforms. Some freelancer platforms have been spotted using the new legislation…
Recruiters and contractors should give themselves a big pat on the back for the largely smooth switch into the new IR35 regulations that came into force in April this year. Good preparation was key, and if you used a tool like the Kingsbridge Status Tool, it undoubtedly made the transition easier.
So that’s it – job done and nothing to worry about, right? Well…not exactly. In this article, we take a look at why recruiters and other partners in the contracting supply chain still need to make sure their IR35 compliance is watertight as IR35 becomes business-as-usual.
Unlike the previous off-payroll regs, the new rules place additional responsibilities and liabilities on other parties in the contracting chain, including recruitment agencies in many cases. We look at what these are, how you can avoid becoming vulnerable, and how to protect your staffing business from the risks.
Are you the fee-payer?
One of the biggest changes in the IR35 reform was that it introduced new responsibilities and liabilities for the fee-payer. The “fee-payer” is the entity that directly pays the contractor – the standard set-up for many agencies engaging contractors on behalf of end clients. Under IR35 legislation, the fee-payer is the “deemed employer”.
If the engagement falls inside IR35, it is the fee-payer who is responsible for deducting the appropriate tax and National Insurance when paying the contractor. This means that although you might not have responsibility for assessing the status of a contractor (this will usually be the responsibility of the end client), recruitment agencies could potentially find themselves liable in the event of a tax enquiry by HMRC.
HMRC are going for the big money
One of the most high-profile recent IR35 cases was the investigation of government body the Department of Work and Pensions (DWP), which resulted in the department having to pay £87.9m in tax owed. The DWP was pursued as the rule change in 2017 meant that the fee-payer in the public sector became liable for correctly deducting the tax and National Insurance of contractors working inside IR35.
These are the same changes that now apply to the private sector too.
As our IR35 tax expert Andy Vessey notes, this case “highlights how much easier it is for HMRC to collect far greater amounts of IR35 revenue from a single engager with contractors all sitting in one place”.
Rather than targeting small amounts from individual contractors, this would seem to indicate that HMRC’s strategy going forward might be to focus energy on pursuing larger “fee-payers” who have many contractors on their books. This case was also closely followed by the Home Office, who received a suspended penalty of £4 million.
Recruitment agencies who act as fee-payers may therefore find themselves targeted in the future, so need to make sure their compliance is top-notch to avoid huge back-payments and potential penalties.
Insurance that protects all parties
The first step recruiters should take is one that hopefully you already have in place – a robust system for IR35 compliance, especially status determinations. Although the responsibility for these ultimately lies with the end client, it is in your and your contractor’s interest to make sure status is assessed fairly and evidence gathered as to why the determination has been made.
As mentioned above, a specialist tool like the Kingsbridge Status Tool can help. The DWP in the case above had used HMRC’s own CEST tool, which has come under some criticism in the past.
The second is insurance. Specialist IR35 insurance can protect your contractors, end clients and your staffing business in the event that HMRC investigates off-payroll work related to your agency.
Kingsbridge’s IR35 Protect insurance is uniquely designed to fit the new IR35 conditions, as it flexes to protect whoever HMRC deems liable in an investigation. That means that if your contractors hold this insurance, and HMRC comes after you as the fee-payer for unpaid taxes, their insurance policy will kick in to cover you, providing cover for any fines, penalties and interest owed.
Some of the partners we work with have started to make IR35 insurance a contractual requirement for the contractors they hire.
However, if you are concerned that your contractors remain unprotected, our Off-Payroll Protect insurance will provide the same protection to staffing business, giving you peace of mind. This policy is designed especially for recruiters who may find themselves in the new position of fee-payer, and don’t want to take the risk of relying on their contractors to take out the appropriate insurance policies.
Having a blanket policy in place to cover all of your engagements provides a safety net to support your carefully planned IR35 compliance. Even if you’re confident in your process for supporting and verifying status determinations, having insurance as a backup means you have the legal protection and expertise in place to challenge any off-payroll investigation that HMRC might bring forward.
To find out more about how Kingsbridge’s tax and legal experts can support with IR35 compliance, email partners@kingsbridge.co.uk or call 01242 808740.
