FAQs from our IR35 webinar: Mitigating IR35 Risk
The new IR35 rules are officially here. These regulations are part of a series of reforms designed to crack down on “off-payroll” working, and with them come new responsibilities for recruiters and end clients who engage contractors. In our recent webinar, we chatted to Kingsbridge’s IR35 experts Andy Vessey, Andy Robinson, Matt Tyler and Ryan Dawson to discuss the key points on mitigating IR35 risk in the IR35 supply chain. If you missed it, you can watch the full recording online. As usual, we had lots of great questions from the audience joining us on the call, and not enough time to answer them all! Here Kingsbridge’s IR35 Consultancy Manager, Matt Tyler, fills us in on some of the answers.
I’m an end-client. Our agency is asking for a copy of our status determination report. Why do they need this? The Status Determination Statement (SDS) is our responsibility, but they are saying that they are liable as the fee-payer. Are we or the agency liable for the penalties of an incorrect determination?
Good question. There are a few stages to this!
- An end client is initially responsible for the status determination process and the liabilities of an incorrect determination.
- Once you have produced the SDS, you have an obligation to pass it on to the worker themselves, and then pass it down the supply chain to each agency until it reaches the company responsible for paying the contractor - the fee-paying entity.
-Once you have done this, the liability shifts from yourself to the fee-payer. They are now responsible for paying any relevant tax for the contractor and bear the liability under IR35.
This means that if, as it currently stands, you don’t pass that status determination statement on, you remain liable for any tax due should HMRC investigate. This also applies to end clients thinking they can hide the determinations from their contractors - this information needs to be passed on, or the liability will stay with you. Take a look at ESM10012 for more information on the SDS process.
HMRC have taken the view that “Mutuality of Obligation” (MOO) isn’t a factor that can be considered in IR35. What are your thoughts on this?
It is our opinion that Mutuality of Obligation cannot be ignored. This has been proven in a number of items of case law, one of the most recent being Jensal Software Ltd vs HMRC (2018) which was defended by our very own Andy Vessey. To take a rather choice quote from Usetech Ltd v Young (2004), Judge Dean had this to say about mutuality of obligation:
"Mutuality of some kind exists in every situation where someone provides a personal service for payment, but that cannot by itself automatically mean that the relationship is a contract of employment: it could perfectly well be a contract for freelance services."
HMRC take a narrow view that the moment a contract is signed, mutuality of obligation is present. As the quote indicates, this is not necessarily correct. Our view that such an act is simply the irreducible minimum required for there to be a contract in the first place - it's all aspects beyond that which determine if mutuality of obligation is present or not.
What can agencies do to ensure that IR35 is adhered to in reality and not just in SDS? What advice do you have for ensuring that agencies aren't left holding the liability if reality doesn't reflect SDS?
If an SDS is completed that isn't an accurate reflection of the contractor's status, one could argue that “reasonable care” has not been taken, which would return the liability back to the end client. This is one of the key reasons why it's important for the end client to ensure that the report generated is accurate. What might be useful for recruiters to know is that the dispute resolution process that is required to be present after the 6th of April isn't just for the contractor - it's for any member of the supply chain to use to raise a dispute with the determination reached. Crucially, disputes can be raised at any point during the currency of a contract. If you decide at any point that the report isn't an accurate reflection of the working arrangements, you should make use of that dispute process, or have a frank discussion with your client.
I’m confused, who is the fee payer? In the webinar you mentioned it being the agency, but wouldn’t it ultimately be the end client who is the fee payer, as they are the start of the chain?
The fee payer is the entity that is responsible for directly paying the contractor's company. This will, in most cases, be the agency that sits immediately above the contractor's company, but may be the end client if they engage directly with the contractor. ESM10017 provides a bit more information on this topic. It doesn’t so much matter where the chain starts - it’s where the contractor’s PSC gets paid from that matters.
Will using a third-party tool like the Kingsbridge Status Tool, rather than the CEST tool, mean that my company has failed its IR35 obligations?
HMRC's own employment status manual says that the client has the ability to subcontract out the process of producing a Status Determination Statement (it’s in ESM10014). The key thing to remember here, however, is that whilst the SDS process can be outsourced, the client does retain overall responsibility for it, so they must ensure that they are happy with the outcomes and that the third party is suitably qualified to make these determinations. Ultimately even HMRC's own CEST tool is not foolproof: whilst HMRC say they will stand by any determination made by the tool should the information entered be accurate, the only way HMRC is going to know for certain that the information is accurate is by launching an enquiry, so it’s not absolute protection by any means.
How can Kingsbridge help?
Huge thanks to everyone who submitted questions to us. It’s clear that IR35 is still proving a headache to some end clients and recruiters. The Kingsbridge Status Tool can support your organisation by providing a clear steer on status determinations, backed up by expert advice on borderline decisions. We can offer IR35 Protect insurance to cover any determination made by the tool, that shifts to protect whichever party HMRC deems liable in an investigation. Kingsbridge’s team can also help agencies with staff training or support you in meetings with clients. With all of this in your IR35 arsenal, you’re well-placed to offer that added value and reassurance to clients and to keep attracting top contracting talent. Just head to our website now to book your free demo.