IR35 risk spotlight for agencies

This is a guest blog by REC business partner Markel

As HMRC renews its focus on IR35 off-payroll compliance in the private sector, recruitment agencies should take note. For agencies in the supply chain, the risk is no longer theoretical: where processes are weak or client determinations are flawed, the financial exposure can be significant. 

More than 5 years after the off-payroll reforms were extended across the public and private sectors, HMRC’s direction of travel is becoming clearer. Several public sector bodies, including most recently the Post Office, have already seen outside-IR35 CEST determinations overturned, resulting in substantial tax and NIC liabilities. For recruitment agencies, those cases are an important warning of what can happen when assessments do not stand up to scrutiny. 

Until recently, the private sector had seen fewer visible examples of this type of compliance activity, which in some cases created a false sense of security among end-clients and fee-payers. That position now appears to be shifting, with HMRC taking a more active interest in how organisations assess and manage off-payroll engagements. 

We are seeing more private sector organisations contacted by HMRC and asked to explain their off-payroll procedures. These fact-finding enquiries are designed to help HMRC decide whether a fuller investigation is warranted. For recruitment agencies, this matters because any weakness in a client’s process can quickly become an issue for the agency if it sits in the fee-payer position. 

Agencies should therefore be confident not only in their own processes, but also in the robustness of the status assessment procedures used by the clients they support. 

HMRC has established a dedicated off-payroll team to enforce the legislation and engage with end-clients that use PSCs. Information requests typically cover a wide range of areas, including:

• The number of workers engaged through PSCs, including a split between direct engagements and those sourced via agencies 
• The procedures followed to assess employment status for tax purposes 
• How individual IR35 decisions were reached, including whether CEST or another assessment tool was used 
• Total spend on the non-employee workforce 
• The number of workers previously engaged through PSCs who are now working via umbrella arrangements 
• Details of any outsourced service providers and the basis on which those arrangements were treated as outsourced rather than labour supply 

These enquiries are broad in scope and go well beyond a simple review of status decisions. They test whether reasonable care has been taken, whether status determination statements have been produced properly, and whether the organisation can evidence a consistent, defensible process. In practical terms, HMRC’s light-touch approach has ended. 

Where a recruitment agency sits directly above the PSC in the contractual chain and makes payment to it, the agency is generally treated as the fee-payer for off-payroll purposes. That means if an end-client’s outside-IR35 determination is later challenged successfully by HMRC, the agency may be left carrying the liability, even where the client made the original assessment. This is why agencies should carry out robust due diligence on client processes, understand how decisions are made, and be satisfied that legislative requirements are being met in practice. 

HMRC activity in this area is expected to increase over the coming years as the department continues to demonstrate that the reforms are delivering against the Government’s objective of tackling disguised employment. Agencies should assume that scrutiny will become more frequent, more detailed and more commercially significant. 

For agencies working with clients that have taken off-payroll compliance seriously and can evidence a well-governed process, contact from HMRC should be manageable. But where responsibilities have been overlooked, assumptions made, or documentation is weak, now is the time to act. Reviewing contracts, assessment procedures and audit trails today could materially reduce exposure tomorrow. 

The Contractor Solutions team within Markel Tax has extensive experience supporting businesses with IR35 off-payroll compliance, from advisory work through to handling HMRC enquiries. Recruitment agencies that want to review their exposure or strengthen their due diligence processes can contact Markel Tax’s IR35 specialists at IR35@markel.com.

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