From Liability to Advantage: Mastering IR35 Compliance for Recruitment

Sam Cox, Commercial Director | Qdos Contractor

For recruitment agencies supplying limited company contractors, it’s vital to have a good understanding of IR35 legislation and processes in place to reduce and mitigate risk. Whilst the IR35 legislation has been in place for over 20 years, the Off-Payroll reforms created a tax exposure for recruitment agencies that did not previously exist.

In this article, I examine what recruitment agencies need to know about IR35 legislation as it stands, the risks of non-compliance, and how protection against risk can be an important competitive advantage.

Off-payroll reforms: what recruitment agencies need to know

In April 2017, the responsibility for determining whether a PSC worker is inside or outside the scope of IR35 legislation was shifted to the hiring organisation within the public sector. In 2021, these reforms were also introduced across the private sector. For recruitment agencies, this is where things became a little complicated.

With the shift in legislation, agencies were now defined as ‘fee payers’ within the labour supply chain. Furthermore, debt transfer provisions in the Off-Payroll rules now made agencies responsible for tax liabilities if workers are incorrectly classified by the hirer, provided they had taken ‘reasonable care’.

This means that now, recruitment agencies can potentially be blindsided by an IR35 enquiry and its associated liabilities. In the first instance, any enquiry will focus on the client, leaving an agency potentially unaware of a process that could hand them significant financial liability due to debt transfer.

Agencies have found themselves in the unusual situation of needing to quickly adapt to new risks and challenges, whilst also making sure their clients are equally educated. To say the least, it’s been a learning curve.

How real is the risk?

The stakes are high when it comes to IR35 compliance. HMRC’s relentless desire to stamp out false employment, coupled with stringent enforcement measures, underscores the gravity of non-compliance.

With HMRC claiming to lose over £1 billion in tax every year, the Off-Payroll rules have given them a new angle of attack. Even using HMRC’s own CEST tool, NHS Digital reported a bill of £4.3million following extensive discussions with HMRC around a number of their assessments.

The early years post-reform were relatively quiet as HMRC allowed the new rules to bed in, and potential tax liability to accumulate. As expected, however, this proved to be the quiet before the storm. At Qdos, we’re currently supporting clients in over two dozen open enquiries launched by HMRC in the past year. Agencies have now had three years to get to grips with the change in legislation, so we can confidently expect to see more enquiries launched which could see agencies on the hook as fee payers.

How agencies can protect themselves

Given everything we’ve discussed so far, it’s crystal clear that any recruitment agency’s twin priorities should be having a reliable method of helping the client determine IR35 status, and protecting themselves against potential tax liabilities.

In practice, for many agencies this will involve utilising a tool such as Qdos Status Review. This tool not only provides robust status assessments to deliver accurate Status Determination Statements, but also provides tax liability insurance covering all parties in the contractual chain. We’ve found this gives recruitment agencies and their clients real peace of mind.

IR35 protection as a competitive advantage

Naturally, any recruitment agency’s priorities are scaling, making placements, and hitting targets. And to do all that, they need to be as attractive as possible to clients and candidates.

Having a thorough compliance process and – even better – having IR35 insurance in place can easily give you the edge over the competition. It is a good way of providing added value to clients thanks to the mitigation of risk.

And because many contractors prefer to work outside IR35, using a reliable tool provides more opportunity to identify roles that can be completed outside of IR35, which a client may assume ought to be inside IR35 either due to a lack of knowledge or an abundance of caution. This can lead to better matches between contractors and roles, resulting in higher satisfaction for both parties involved.

Ultimately, mastering IR35 compliance isn’t just about avoiding penalties — it’s about leveraging it to gain a strategic edge in an increasingly competitive market.

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