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IR35: Why Recruiters/Clients Shouldn’t Make Blanket Decisions

Most end-clients are now responsible for assessing the IR35 status of any contractor they hire, and they’ll be liable if their decision is found to be incorrect.

The apparently simple solution of making advance, blanket decisions may appear to be attractive as it may appear to negate the need for expensive and time-consuming new processes. But, as many have already discovered, blanket decisions are not the easy fix they might appear to be. 

Blanket “inside” IR35 decisions

Public sector organisations have been dealing with IR35 reform since 2017, and it came into effect for everyone else in April 2021. In that time, we've seen many end clients try to force all their contractors inside IR35, or refuse to work with PSCs, which has the same effect. The resulting increased costs and recruitment difficulties have persuaded the majority to abandon this strategy, in favour of individual IR35 assessments.

So why does treating contractors as inside IR35 increase costs?

There are two main reasons:

  • If the contractor is inside IR35, the hirer or “fee-payer” must pay employer’s national insurance. This is not due on payments made to contractors working outside IR35.

  • The contractor experiences a drop in their take-home pay, and those in a position to bargain will expect an increased rate to offset this.

In addition, the fee-payer must deduct PAYE tax and NICs before paying the contractor, which adds an additional layer of complexity and cost to invoicing and payroll processes.  

It’s easy to predict the disastrous consequences a blanket inside IR35 decision could have on recruiters and clients alike, as they struggle to attract and retain quality workers with the skills they need.     

Blanket “outside” IR35 decisions

The reverse solution, making blanket outside IR35 is also not advisable. While it keep contractors happy and avoid the additional taxes, at least temporarily, HMRC are specifically looking out for hirers making incorrect outside decisions. Deciding outside without completing an assessment will leave you without the necessary evidence to support your decision, which will make it a very risky strategy indeed.

So, what’s the answer?

The only sensible strategy is to assess IR35 status individually and correctly. That way, hirers can control the risks to their business by keeping their costs down and workers happy wherever possible, while still complying with the law.

It may also be possible to adapt contracts and working practices to increase the likelihood of correct outside IR35 decisions so more contractors are legitimately working outside IR35. In this way, end clients could minimise both the compliance risk, and the costs associated with paying contractors inside IR35.

In most cases this would mean seeking the assistance of compliance experts like Orange Genie Compliance.

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