What is reasonable care?

To comply with the off-payroll working rules, clients must take reasonable care in determining IR35 status. HMRC define reasonable care as acting “in a way that would be expected of a prudent and reasonable person in the client’s position”. Examples include: Seeking the advice of a professional advisor Checking determinations remain valid/accurate Reviewing processes for continued improvements Read more about what does and doesn’t amount to reasonable care.

What is a small company?

A small business is defined as a company which satisfies two or more of the following requirements: The company has an annual net turnover of less than £10.2 million The company has a balance sheet total of less than £5.1 million The company has less than 50 employees Learn more about the small companies exemption.

Off Payroll Working (IR35) - Qdos Commercial Services

Off-Payroll Working (IR35) for recruiters and end clients

If you’re a UK business or recruitment agency engaging limited company contractors, you’ll need to consider the off-payroll working rules, also known as IR35 reform (Chapter 10, Part 2 ITEPA 2003).

For over 20 years contractors have been managing their own employment status for tax under the IR35 legislation (Chapter 8, Part 2 ITEPA 2003). The off-payroll working rules were introduced into the public sector on 6th April 2017, and the private sector on 6th April 2021 to change that.

Put simply, the reform changed who was responsible for determining status and paying tax under the IR35 legislation. Companies who hire limited company contractors are responsible for checking the employment status of their workers, and fee-payers (the businesses which directly pay the contractor’s company) are responsible for ensuring the right taxes are paid to HMRC.

This puts businesses, recruitment agencies, and consultancies at financial risk for non-compliance, such as NHS Digital who were handed a £4.3million tax bill in 2019 for setting IR35 status incorrectly (despite using HMRC’s own CEST tool to do so).

There’s good news though! Qdos are the UK’s leading IR35 advisers and have helped over 2,800 businesses like yours manage off-payroll working (OPW). Whilst understanding the complex legislation itself can prove tricky, there are some simple steps your business can follow to ensure compliance.

From end-to-end assessment services and IR35 insurance to reviewing your outsourced service arrangements, we can help you write policies, implement processes, and keep your projects on track.

Popular services for managing IR35 compliance

What are the off-payroll working rules (IR35 reform)?

The off-payroll working rules are a part of UK tax avoidance legislation (IR35), specifically referring to Chapter 10 Part 2 ITEPA 2003.

The IR35 legislation is all about a contractor’s employment status for tax (IR35 status). It aims to identify if the contractor is providing genuine business-to-business services or if they’re acting as an employee of the end client’s company (a disguised employee).

The off-payroll working rules require the end client company to assess the contractor’s IR35 status and make this decision. The fee-payer, also known as the deemed employer (the party in the contractual chain responsible for paying the contractor) must, in turn, ensure the correct tax is paid to HMRC.

The rules apply to public sector organisations and medium or large private sector businesses that hire the services of personal service companies (limited company contractors).

Engagements between contractors and small companies are exempt from the rules. This means that these contractors retain responsibility for both determining their IR35 status and deducting any relevant tax and National Insurance contributions when working for a small company in the private sector.

What do you need to do to comply with the IR35 changes?

Businesses engaging limited company contractors (personal service companies) in the UK will need to ensure compliance with the off-payroll working rules (IR35):

Review your supply chain and your responsibilities within it
Keep a record of decisions, processes, and policies
Ensure your responsibilities are dutifully carried out
Regularly review your compliance

The first step to compliance is always a review of your supply chain to determine your responsibilities within it. Below we highlight the key responsibilities for a typical contractual chain (client - recruitment agency - limited company) however there are variations when it comes to managed services as well as overseas arrangements.

View full checklist for agencies and end clients

Your responsibilities as the end client

If you’re a medium or large private sector business, or a public sector organisation engaging contractors, you must:

1. Assess the IR35 status (employment status for tax) of all contract workers

2. Take reasonable care in making IR35 decisions and managing compliance

3. Issue a Status Determination Statement (SDS) to the worker and next party in the supply chain (usually recruitment agency)

4. Implement a client-led disagreement process to handle any subsequent disputes

Your responsibilities as the fee-payer

If you’re a recruitment agency filling contractor roles on behalf of clients and directly paying the contractor’s fees to the limited company, you’re likely going to be the fee-payer in the supply chain, also known as the deemed employer.

As the deemed employer you’ll need to:

1. Deduct the appropriate income tax and national insurance (NI) from the contractor’s fee before making payment, and pass this to HMRC

2. Pay the relevant Employer’s NI and Apprenticeship Levy to HMRC

If you’re a recruiter in the supply chain but aren’t considered a fee-payer, your responsibility will simply be to pass the SDS received to the next party until it reaches the fee-payer.

Further issues to consider

With a complex legislation like IR35, there are various factors to consider when implementing your IR35 compliance strategy:

Employment rights

In 2018, a HMRC contractor, Susan Winchester, successfully claimed for unpaid holiday pay of more than £4,000 in an out-of-court settlement, following her inside-IR35 determination from HMRC. Whilst there remains a misalignment between employment status for tax vs employment rights such as holiday pay, this instance stands as a warning to organisations looking to apply inside-IR35 determinations to reduce risk, as it in may raise another in the form of employment disputes.

HMRC’s CEST tool

The Check Employment Status for Tax (CEST) tool is HMRC’s free tool to help businesses determine IR35 status. Whilst this may seem like a good idea, we would never recommend using it in isolation. CEST has been criticised by pretty much the entire contracting industry, including the House of Lords, and leaves 20% of assessments “undetermined”. Read more about CEST and why we advise against it.

Contrived arrangements

Many organisations have held Statement of Works up as a way out of the off-payroll working rules. This is because clients being supplied genuinely outsourced services are exempt from making assessments, and the provider becomes the client for IR35 purposes.

However, these arrangements have to be genuine. Changing existing arrangements from provisions of labour to outsourced services or simply replacing written agreements to Statements of Work simply won’t cut it. Find out more about Statements of Work and outsourced services.

Frequently Asked Questions

To comply with the off-payroll working rules, clients must take reasonable care in determining IR35 status. HMRC define reasonable care as acting “in a way that would be expected of a prudent and reasonable person in the client’s position”.

Examples include:

Seeking the advice of a professional advisor
Checking determinations remain valid/accurate
Reviewing processes for continued improvements

A Status Determination Statement (SDS) is a document or email confirming the outcome of an IR35 status determination for an engagement with a contractor.

The SDS must include both your status decision and the reasons behind your conclusion.

The statement must be provided to the contractor and passed along the contractual chain to the fee-payer. Until your obligations are completed, you will be considered the fee-payer and as such liable for non-compliance.

Download an SDS template

The client-led disagreement process is an attempt to ensure contractors have the opportunity to dispute a decision given to them in order to combat concerns that clients would simply avoid their own risk and assess contractors as inside IR35 (known as blanket assessments).

The limited company contractor notifies you that they disagree with the status determination given
You must respond within 45 days of notification with the result of your reconsideration as well as your reasoning for it.