As the deadline looms for changes to the off-payroll working rules, we are noticing a worrying trend in recruitment agencies offering IR35 review or Status Determination Statement (SDS) services. Typically, the agency procures an automated SDS production tool, completing it for the contractors they have placed and passing it to the end-client to rely upon. Although this is done to help clients through the transition, in our view recruiters should avoid this activity or think carefully about their processes.

The reasonable care risk

The off-payroll rules place a very clear obligation on the end-client to produce and issue an SDS. In doing so they are required to take “reasonable care”. This will, as a minimum, involve an assessment of the working practices of the role together with a review of the relevant contracts in place.

It is acceptable to outsource this review to a suitably qualified specialist. The risk arises if the individual tasked with completing the SDS tool is not an expert in employment status or cannot accurately answer the pertinent questions. It is also likely that a review of the contracts will be omitted from this process and the SDS may be “signed off” by a client representative who is far removed from both the contract and day-to-day working arrangements.

The likely outcome is that HMRC would find that the client has not fulfilled their obligations. Should this be the case the client will become the ‘deemed employer’ under the legislation and will be pursued by HMRC for all the tax and NIC [National Insurance Contributions] due plus interest. HMRC has offered to help correct any honest mistakes in the first 12 months, but intentional failure to demonstrate reasonable care may still trigger penalties, bringing significant reputational damage for the recruiter.

Insurances

While comfort could be taken via a tax loss insurance policy it is unlikely that an insurer would stand by a claim in the event where a recruiter had unwittingly inputted incorrect information into an SDS tool. Recruiters should also check their Professional Indemnity cover to ensure that they are insured for this type of work.

Managed services company risk

The biggest sting in the tail, however, could be the impact of MSC legislation introduced in 2007. Providing a service related to IR35 is likely to be considered as falling outside of the agency exemption and may therefore bring the MSC rules into consideration.

Senior accounting officer (SAO) risk

For larger businesses (end-clients and recruiters) affected by the SAO reporting rules, there is an additional consideration that the business has not properly managed its tax risks, appropriately managed the implementation of a new system, ensured that appropriate training has been given and obtained the necessary facts to make judgements. This can result in personal financial penalties for the SAO and corporate penalties for the business.

Remember, it is the client’s obligation to get IR35 right. Many do need support to do this, but we would advise you to think twice about whether your team has the experience to provide a service that will stand up to HMRC scrutiny. 

Matt Fryer is head of legal services at Brookson Legal

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