Managing the challenges of IR35

This has put recruiters in a difficult position. Ultimately, they are not responsible for conducting IR35 determinations, yet they will be expected to foot the bill for mistakes made by the end client. 

It is why agencies must prioritise IR35 and work with the end client to ensure that the contractor placed is working under the correct IR35 status. Quite simply, it is in their own financial interests to focus on IR35. 

CEST must be used to assess IR35 status

Contrary to popular belief, HMRC’s Check Employment Status for Tax (CEST) tool is not mandatory. Businesses are under no obligation to use the tax office’s IR35 technology to determine if a contractor belongs inside or outside IR35.

I do not blame businesses for presuming they need to use CEST, though. Naturally, HMRC promotes it as a great success. But in reality, it poses a significant risk to IR35 compliance.

Should HMRC find a business guilty of ‘blanketing’, it will automatically become the fee-payer.

Not only does it fail to deliver an answer roughly 20 per cent of the time, but it has also been dismissed in IR35 court cases (which is when it really matters) and HMRC itself will not necessarily stand by a result that has derived from its very own tool. 

As touched on already in this article, you only need to look at the multi-million pound tax bills handed out to government departments – most of whom relied solely on CEST – for evidence that this tool is not up to scratch. 

Blanket IR35 determinations are non-compliant 

This is true. Businesses that place multiple contractors inside IR35 without taking ‘reasonable care’ (a requirement under the IR35 legislation) are non-compliant. Should HMRC find a business guilty of ‘blanketing’, it will automatically become the fee-payer and therefore liable for IR35.

What is more, blanket determinations also effectively rule a business out of being able to attract flexible talent in a cost-effective way. After all, contractors are unlikely to accept inside IR35 contracts without a significant rate rise to take into account the fact that they are taxed as employees, under PAYE. 

Ask yourself, would you, as a genuinely self-employed contractor, accept an inside IR35 contract and potentially up to 30 per cent less take home pay? Or would you look elsewhere and find a contract that gives you a fair shot at having your IR35 status assessed fairly? We both know the answer to this. 

Contractor bans are also non-compliant

Closely related, but different to blanket determinations, are contractor bans – when a business chooses to stop engaging contractors altogether as a direct result of IR35 reform. In many cases, these companies are insisting that all contractors operate via umbrella companies or become permanent employees. 

A rigorous assessment of all aspects of both the contract should be carried out before an IR35 determination is made.

While this approach is technically compliant, given IR35 is no longer a consideration if contractors work through an umbrella or as employees, it is a short-sighted, risk averse and expensive way of managing – or more accurately, mismanaging – IR35 reform.