It has been reported this month that a contractor has won a significant victory in an IR35 case, in which the contractor escaped a tax bill of as much as £50,000. Although the contractor was successful in appealing against the determination, the sheer size of the figures involved means that it is perhaps worthwhile revisiting the IR35 issue and what it means for recruiters.
IR35 – a brief overview
IR35 is a tax law which applies where a contractor’s assignment is akin to one of employment (but for the existence of the agency or another intermediary). Where IR35 applies the contractor is exposed to a tax liability equivalent to the PAYE and National Insurance deductions that would have been made had the relationship been truly one of employment.
Whether or not the engagement is regarded as one that is similar to one of employment for these purposes will largely depend on the terms of the contractual agreement in place. However other factors may also be taken into account including the actual working practices.
The implications of IR35 for recruitment consultancies
There is no provision in the IR35 rules for the tax liability to fall on, or be passed to, a recruiter. However there is a theoretical possibility that in certain circumstances an IR35 determination against a contractor could expose an agency. If an agency has given the contractor some kind of guarantee or undertaking that the contractor will not be caught by IR35, the agency could find that the contractor decides that they wish to pursue a claim against the agency for breach of contract or even for negligence. Recruiters should therefore be careful not to offer any such guarantee, even where a properly drafted “IR35 friendly” contract document is in place (since the actual working practices may also come into play).
The other practical implication of IR35 for agencies is that they may find contractors requesting amendments to the contract for IR35 purposes. There is of course no legal obligation to accept or reject such amendments, and whether or not a recruiter agrees to them is often a commercial decision. We would however advise exercising caution to ensure that the contract reflects the actual requirements of the assignment – for example don’t agree to flexible working hours if the client expects a 9-5 working day! If in any doubt about the effects of a proposed amendment, seek legal advice.
Lawspeed can advise and assist with the practical implications of IR35, please call us on 01273 236 236.