How everyone in the supply chain can mitigate risk
IR35 reforms in April mean that there are big changes coming to the way that the contractor supply chain works. Everyone in the chain – end clients, recruiters and contractors alike – should prepare now to ensure a smooth transition. IR35 reforms bring new responsibilities for end clients, who will have to assess the tax status of contractors, and new liabilities for “fee payers”, who are responsible for the deduction of any tax and National Insurance that becomes due.
And, as the results of our latest survey show, contractors are keeping a close eye on how businesses respond to IR35, and are prepared to walk away from or renegotiate contracts that bring them inside IR35 unnecessarily. This blog looks at how everyone in the contractor supply chain can play their part in mitigating risk, while retaining the best contracting talent.
Mitigating IR35 risk for end clients
From the 6th April 2021, the responsibility for status determinations lies with you if you are a medium- or large-sized company employing contractors through their personal services companies or other intermediaries. We’re advising end clients to get prepared now for how they will assess the status of their contractors.
Wherever possible, we’d recommend avoiding approaches that bring contractors inside IR35 unnecessarily or over-cautiously, as this could result in the loss of your best talent and hamper your ability to fill contracts. In our recent contractor survey, we asked contractors what they would do if they were forced inside IR35.
- Almost a third (29%) of contractors said they would leave and seek alternative work if placed inside IR35.
- A further 40% said that they would stay, but raise their day rate to cover the extra costs they would be facing.
- Just 14% of contractors said that they would accept an inside IR35 determination.
There are a variety of methods and tools that end clients can use to help them assess status – we break down the most common ones in this blog and look at their pros and cons. With very little time left now before the April reforms, we’d recommend a solution that can produce results quickly and accurately, but that offers the reassurance of a human expert eye where necessary.
How recruiters and agencies can mitigate IR35 risk
Agencies and recruiters won’t be ultimately responsible for producing status determinations, but as the middle party in the contractor supply chain, you’ll be the one negotiating to keep everyone happy, making sure that your contractors end up with the determination that they want and that the end client is supported to make a fair and legal decision with reasonable care.
You might want to consider IR35 training for yourself or your staff, so that you are well-placed to advise clients on assessing status and changes to working practices or contracts that might be necessary to ensure engagements are outside IR35.
If, as an agency, it’s you that pays the contractor, rather than the payment coming direct from the end client, this also puts you in the position of fee payer. This means that it’s your responsibility to deduct the necessary tax and National Insurance if a contract is inside IR35.
The fee-payer is also the party that is likely to be liable for any unpaid tax, legal fees and fines if an IR35 tribunal finds that a contractor working outside IR35 should have been inside. IR35 may therefore present new risks to recruiters, so you need to make sure you understand the contractual terms and working practices of each role that you fill, and work with contractors and end clients to produce a status determination that fulfils the legal requirements and keeps everyone happy.
Smart recruiters may also want to require their contractors to have comprehensive business insurance that includes cover for IR35 disputes and defence costs, taxes, interest and penalties deemed payable by HMRC. Kingsbridge’s IR35 Protect insurance is a unique product, designed with contractors in mind, but one that flexes to cover the rest of the contractor supply chain in the event of a legal challenge from HMRC.
Mitigating IR35 risk for contractors
While the IR35 reforms shift some of the responsibility of status determinations away from contractors and onto end clients, this can mean contractors having to make a stronger case for the determination they want. Be wary of blanket bans, where end clients deem all contractors inside IR35 or refuse the use of personal services companies.
Many of our contractors said in our survey that they would walk away completely in the event of a blanket ban or umbrella determination.
Remember that if contractors are working with smaller companies (where two or more of the following apply: a turnover of less than £10.2 million; a balance sheet of less than £5.1 million; or less than 50 employees), then status determination is still the contractor’s responsibility and they should take reasonable care in assessing it for each new contract that they start.
Kingsbridge’s IR35 Protect is an essential piece of cover for contractors as we move into these reforms, and because it’s flexible it will cover whoever HMRC deems liable in the event of an IR35 tribunal. End clients and agencies will appreciate the professionalism and responsibility of contractors holding IR35 insurance that offers them protection too.
Prepare for IR35
Whatever part you play in the contracting supply chain, now is the time to get ready to ensure you’re not exposed to unnecessary risks from IR35 come April. Kingsbridge’s IR35 solutions are created by a team of experts headed up by tax guru Andy Vessey, who has over 20 years’ experience defending IR35 cases.
As well as the unique, hybrid Kingsbridge IR35 Status Tool to help assess your contracts, we can also offer staff training, support with client meetings and an IR35 helpline where you can get your queries answered by a professional. End clients and recruiters can sign up for a free demo of the tool today, and get the preparations underway.