IR35 update: April 2021
Grab a coffee or a can of Monster, its time for another IR35 blog.
A few weeks back I attended a webinar held by HMRC about the changes in the IR35 legislation. The changes are less in the detail of the legislation and more in its scope, from April 2021, private sector organisations of a certain size are now caught by the legislation and must determine the IR35 status of temporary workers. Predictably, the attendees of the webinar were mainly from private sector HR teams or private sector focused recruitment companies, wanting to gain a clearer understanding of the rules that we in the public sector have been familiar with since April 2017. But it was useful from my perspective aswell, to have a refresher but also to understand some tweaks to the legislation which have been rolled out to coincide with the expansion of its scope.
The two key ones are:
Status Determination Statements. The client has the responsibility for making the determination and they must provide the evidence of their decision, in the form of an SDS. The SDS could be the pdf output from the HMRC assessment tool with a covering note. It could also be clients come up with those own templates or letters. The SDS then has to be passed to all parties in the contractual chain.
To be valid the SDS must:
- State whether the contractor would be treated as an employee or not if engaged directly.
- Provide the reason for coming to that conclusion (most likely the output of the HMRC assessment tool would be inserted here).
- Have taken reasonable care in coming to that conclusion. (It can’t just be a couple of lines of text with no supportive evidence).
Recruiters now need to be disciplined in ensuring they have an SDS before a candidate starts a role, and it needs to be sent to the candidate and / or and the umbrella company if they are using one. Candidates who are up on the rule changes will know they are entitled to see a copy, so recruiters ought to be pre-emptive with clients, when they have an offer or it looks like they are going to place a role, they need to make clear to the client their responsibilities in running the test and providing the SDS before the start date, and additionally advise them the SDS needs to satisfy the 3 criteria above to be valid.
If the client does not provide a valid SDS they become responsible for the deduction of tax and NIC – which should motivate them into ensuring that the SDS is compliant. Similarly if a client passes an SDS to the recruiter and the recruiter does not pass it to the umbrella and / or candidate, the recruiter become liable for income tax and NICs. In multi agency contractual arrangements, the SDS must always be passed fully down the chain, any party breaking that link and not passing it to the next party down holds the liability for tax and NIC deductions. HMRC recommends that all agencies have clear process maps and regular audits to ensure they can evidence how SDSs have been received and shared.
Status Disagreement Process.
Candidates and agencies have the right to raise with the client disagreements in relation to the SDS. The representations should contain the reasons why they disagree. The client has to respond, but if the final payment has been made, i.e. if the contract has essentially concluded and the last payment has been made down the chain, the client does not have to respond.
I have my doubts as to how this will work in practical terms. If a candidate disagreed with the SDS before the start date (most likely they think a role is out of scope and the client thinks it is in scope) then they just won’t accept or start the role. It is possible a candidate could be determined in, they agree to start but once in the role they feel it is out OR they are working alongside other contractors performing similar activities who have been determined out. In this instance, they could raise their challenge which has to be answered by the client, but equally if the candidate was making too much fuss the client could just serve notice under the terms of the contract. The candidate could feel aggrieved or seek legal advice at being let go, but they shouldn’t really have any legal recourse, the nature of contracting is that you can be let go at any time provided the client gives the specified notice in the contract.
As per point 3 with the SDS, the client does have to make sure that when making original determination, or considering a challenge to a determination, they have applied “reasonable care” in arriving at their decision. So a candidate could quite reasonably challenge a client who it feels is making blanket in scope decisions on all contractors. But I am not sure that is happening anymore in the public sector, although it could well happen in the private sector as organisations get used to the rules, and operate in a risk averse way much like public sector organisations did around April 2017. Either way it certainly feels like there is a little more power with candidates, and it seems feasible that organisations facing repeated status disagreement processes from disgruntled contractors could be flagged to HMRC for investigation.
Having had three years in the public sector to become accustomed to the rules, I think they function fairly well, and for the most part clients make an IR35 determination clear at the point of providing the brief, which means the agency can go to market fully informed to conduct their search, and candidates who make a decision on their interest in a role based on that determination, plus the other usual factors. But for the private sector this will feel newer and potentially fraught with more risk, the period of adaptation to the updated legislation might be longer and bumpier.