IR35: Client and Agency – Shifting Relationships

Changing the game

We all know that the impending IR35 Off Payroll in the Private Sector will affect contractors who operate their own PSCs – but how will it affect the relationship between agencies and their clients?

Under the new legislation, clients, for the first time, will have “skin in the game” as they will be responsible for making the Status Determination Statement (“SDS”) to designate a role “inside” or “outside” IR35.

Clients could also find themselves liable for a contractor’s tax and NIC if they do not use reasonable care in making that assessment, or fail to cascade the SDS to the agency and the contractor. This a complete game-changer as previously only the contractor was responsible for assessing their status.

As a result, clients will become much more IR35 focused and will need to implement processes to mitigate any potential tax liability. It would therefore be unwise for clients to appoint agencies based simply on cost (as many cost savings historically have been driven by non-compliance which clients could afford to ignore in the past).

This means that clients will be much more interested in the compliance of their supply chain. Consequently, we may see a substantial consolidation of supply chains and a growth in market share of agencies who can demonstrate compliance.

Clients may also demand that their agencies demonstrate that not only are they compliant, but that their suppliers who they outsource payroll or employment functions to (umbrella companies) are also compliant. Most agencies have limited audit processes in place to check their suppliers but at the very least they should ensure that any umbrella is:

  • based in the UK
  • a member of a recognised professional trade organisation and
  • has adequate insurance.

Many agencies are already substantially enhancing their checks and reforming their referral agreements with accountants and umbrella companies.

A need to plan

Additionally, to mitigate risk, some clients may make “blanket assessments” (deeming certain roles to be inside IR35 rather than assessing each assignment individually). Although the legislation indicates that clients must use reasonable care when making such assessments, there will be some clients who have decided that they do not want to risk continuing to use contractors working outside IR35.

Clients who take this approach face the commercial risk of key contractors with transferable skills threatening to leave and they also face the prospect of challenges by contractors to the SDS. Agencies will therefore need to undertake significant planning to avoid possible loss of talent where the client decides they cannot risk continuing to use PSCs.

Additionally, many agencies and clients who are dependent on PSC contractors will need to undertake planning to avoid increased costs in long term projects, retrospective employment or tax claims and inevitably, new tax avoidance schemes leading to potential criminal liability under the Criminal Finances Act.  

There will also be some agencies which move to a statement of work approach, especially for more specialist projects. Agencies providing genuine ‘SOWs’ will be outside the scope of the legislation, but they need to be genuine- merely labelling it a ‘SOW’ will not work.  Clearly some types of assignments will lend themselves more easily to a’ SOW’ arrangement than others.

Clients will inevitably be asking their legal departments to ensure that the contracts with their agencies are robust with well-drafted indemnities which flow all liability down to the agency regardless of negligence.

Finally, with April 2020 quickly approaching, clients and agencies will need to work together in the next few months to mitigate the impact of the legislation and to ensure that they have systems and processes in place to comply with the new rules.