How can recruitment agencies manage IR35 reform?

What IR35 reform means for recruitment agencies and how they can better manage IR35 moving forward

In 2017, public sector bodies acting as the fee payer when engaging contractors in the public sector were handed the responsibility of determining the IR35 status of these workers. This controversial change of the rules means that IR35 liability has been taken away from the contractor and now rests with the party paying the worker, often the recruitment agency.

In the private sector, existing legislation requiring the contractor to determine their own status remains unchanged. But for how long? Well, the Government is consulting over the possibility of private sector reform and an announcement could be made in the Autumn Budget this November, with a view to roll-out changes as early as April 2019. Speculation perhaps, but all too many IR35 experts believe further reform is a case of when, not if.

This is good enough reason then - vital in fact - for recruitment agencies to prepare for what seems like inevitable reform. Should agencies’ response to potential private sector changes mirror the public sector’s, they risk deterring contractors and their very competitiveness in the temporary recruitment industry, which in 2017/18 was valued at £28.2 billion.

Put simply, agencies need to get to grips with IR35 changes quickly. So here’s how they can manage them.

Consider unique working arrangements

Blanket IR35 determinations in the public sector have understandably discouraged contractors from working with particular organisations, namely The BBC and The NHS. Ultimately, contractors do not want to be placed inside IR35 without a fair assessment of their individual working arrangement.

When administering IR35 themselves or assisting clients in the process, recruitment agencies must realise the importance of making well-informed decisions on a case by case basis. Doing so will help ensure compliance and give contractors confidence they can work outside IR35 through a particular agency.  

Work together

Accurate IR35 determinations take into account a number of factors from each party in the supply chain - from the end client, to the recruitment agency, to the contractor. Without collaboration, the objectivity of any resulting decision could be called into question. 88% of contractors surveyed by Qdos Contractor agree, and do not believe accurate assessments can be made without their contribution. With this in mind, recruitment agencies should consult each party, not least contractors, when determining IR35 status.

Don't rely solely on CEST

Where do we start with HMRC’s IR35 tool? Time and time again, CEST has been found to be incapable of providing accurate answers.

Since its release, many IR35 specialists have urged against the use of the tool - that has provided over 750,000 answers - for fear that it will not stand up in court. This theory was supported when recently, CEST was reviewed by an employment lawyer with the tool providing the correct answer only 14 out of 24 times.

CEST is not mandatory though, and recruitment agencies should bear in mind that independent assessments are allowed. Although, for obvious reasons, HMRC prefer to keep this fairly quiet.

Get proactive

Many public sector engagers found it difficult to administer IR35 because preparations began too late. But in fairness, these agencies and organisations weren’t helped by HMRC’s lack of guidance.

Should further changes arrive, recruitment agencies need to be in a position to make correct decisions before reform is enforced. Starting the process upon the introduction of changes results in rushed and incorrect assessments, much like in the public sector.

In addition to assessing each newly placed contractor’s status, agencies are advised to review the IR35 status of those already working on assignments. Assessing a worker’s actual working practices can carry more weight in an IR35 investigation given it reflects the reality of the contract, not simply what was agreed at the beginning. Starting this process now will lessen the workload when widely expected reform is introduced.

Communicate with contractors

Contractors lack faith in engagers’ ability to make accurate IR35 status decisions, and you only need to look at the public sector to see why. Therefore, it’s essential recruitment agencies reassure contractors they are equipping themselves with the knowledge and expertise so workers can continue to work outside IR35. Working under the legislation or through an umbrella company are not the only options available to contractors - and agencies should reiterate this.

After public sector changes, it emerged only half of recruitment agencies had contacted contractors about reform. Needless to say, communication is key, and could be a deciding factor as to whether a contractor works through an agency or not.

Consider specialist advice

IR35 legislation is complex, which often leads to confusion over contractors’ status and - in the public sector - engagers placing individuals inside the rules to protect their own liability. But this risk-averse approach is short-sighted and actually non-compliant.

To protect themselves throughout the process and for the long-term, agencies might want to consider engaging a third-party IR35 specialist to ensure they are engaging contractors compliantly in the public sector, and before long, perhaps the private sector too.