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Markel Tax

15 Mar 2021

IR35: What do recruitment agencies need to do to protect themselves?

Agencies will be the ones seen as responsible for any unpaid tax as they’re considered the ‘fee-payer’ in the updated legislation which is huge burden to carry. Therefore, agencies understandably may now want to carry out their own due diligence to ensure the Status Determination Statement (SDS) document is a true representation of the status.

Nevertheless, this legislation does present the more proactive agencies with a fantastic opportunity to approach their end clients, not only with a solution where the due diligence on contracts and working practices has been undertaken, but also one which would give the end client all the information needed to create a valid SDS to issue to the relevant parties.

As a recruitment agency what do we need to be aware of?

The legislation means increased responsibilities for agencies, especially if your contractors are caught inside IR35. These responsibilities include:

  • Administering the IR35 status decision

  • Providing an appropriate contract as a result of the SDS

  • Deducing any NI and Income Tax where appropriate in-house

  • Charging the client if Employer NI is due (if the engagement is within IR35)

  • Paying the contractor net as opposed to gross invoice value

  • Paying the taxes deducted to HMRC

  • Reporting these taxes to HMRC

We are the agency closest to the client and there is another agency beneath us in the chain which engages the contractors. What obligations do we have under the new proposals?

As the agency closest to the client, you will receive the SDS from the client. It is your obligation to pass this SDS down the chain to the agency beneath you.  If you fail to pass this down, you will effectively stand as fee-payer (with the associated potential liabilities) until this is passed down.

We are the agency dealing with contractors and understand we are the fee-payer, what exactly is our exposure if HMRC decide an engagement is caught?

Assuming you have received an “outside of IR35”  SDS and have been paying the contractor gross, if HMRC subsequently challenge this then, as the fee-payer, you are the party who is primarily liable for the unpaid tax and NI which should have been deducted.  And it is your agency that will need to defend the IR35 position in the event of an HMRC enquiry.

This may seem unfair given that it is the client who made the decision, but this is how the legislation is worded.  The end client may become liable if it did not take reasonable care making the decision on IR35, but in most cases the liability will rest solely with the fee payer.

As the fee-payer agency what do I do if I don’t receive a SDS? And what do I do with SDSs I do receive?

As mentioned above, if you don’t receive the SDS then, technically, you cannot be held liable in the event of an HMRC Enquiry (as effectively the last party holding the SDS is the party deemed as fee payer).   As a point of best practice, we would recommend that you request the SDS if you have not received one for a particular contractor. However, the legislation does not oblige you to do so.
In respect of the SDSs you have received, as you are the party who will be the subject of an HMRC enquiry, it is vital you keep copies of all the SDS’s so that you can demonstrate to HMRC that you have complied with your obligations under the legislation.  Written documentation is key to ensuring HMRC enquiries move more quickly and efficiently.

How can I protect my business and ensure I have taken the right due diligence?

As a fee-payer, the new IR35 provisions will undoubtedly have an impact on your business and you will need to navigate the complexities of the legislation and case law. The legislation puts you in the spotlight and you will be the one liable for any unpaid tax.

It is therefore vital that you take the correct due diligence and ensure you are protected against HMRC enquiries.

We have been advising and defending clients against IR35 challenges since the introduction of the legislation 20 years ago. We offer a complete package of due diligence services to ensure you are well prepared and protected.

Our FeePayer Protect insurance is specifically designed to defend against an HMRC enquiry and even the potential tax losses where you are also the fee payer. What’s more, we’re able to provide you with contract reviews including the whole supply chain from end-client through agency to the contractor, support in drafting an SDS, as well as training and on-going support from our tax experts.

Speak to our team today to find out how we can help you protect yourself against IR35 risks. Call 0333 920 1589 or request a call-back.
Tagged IR35
Next article in series

15 Mar 2021

What is IR35 and what is happening on the 6th April?