Recent actions by HMRC against fraudulent avoidance of tax payments demonstrate the importance of knowing any risks with IR35 in the supply chain. Crawford Temple explains.
In December 2024, HMRC was granted a freezing injunction against an umbrella company supplying healthcare workers to the NHS to the tune of £171 million in underpaid national insurance contributions.
The case has sent ripples across the contractor market, as well as threatening the emergence of potentially risky “copycat” schemes targeting the displaced workers. For end hirers, it has highlighted the importance of knowing who they are working with throughout the supply chain, recognising that their responsibility extends beyond simply engaging talent.
The IR35 or off-payroll working legislation that came into effect in 2017 in the public sector and 2021 in the private sector places the employer at the centre of compliance responsibility and at the heart of this lie Status Determination Statements (SDSs).
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When engaging contractors, the employer must provide accurate SDS that correctly classify whether workers fall inside or outside the rules. This determination must be based on a thorough assessment of the working relationship, not convenience or preference.
Failing to issue an SDS opens the door for others in the supply chain to make their own determinations, which may prioritise financial advantage over compliance.
Strict parameters
A defence against potential liabilities begins with creating strict parameters for recruitment partners. Businesses should consider implementing requirements that contractors can only operate through accredited providers with proven track records.
Many organisations now specify minimum operational timeframes and financial stability requirements for these providers, ensuring they’re engaging with established, legitimate businesses rather than newly-formed entities designed to exploit regulatory loopholes.
It helps to develop comprehensive contracts with recruitment partners that explicitly outline compliance expectations. These agreements should establish that the business, as the end client, maintains ultimate control over compliance standards throughout the supply chain.
Recruitment companies should also understand that their relationship with the end hirer depends on adhering to these standards without exception.
Understand the risks
Be wary of schemes claiming to have conducted “blanket assessments” that conveniently result in “outside” determinations.
Proper status determination requires individual assessment of each engagement based on its specific circumstances. The attraction of gross payment arrangements may tempt workers to follow questionable advice from scheme operators, especially when they believe the tax liability sits elsewhere.
Similarly, PAYE-style arrangements must be structured correctly to avoid inadvertently triggering off-payroll legislation requirements.
If the business or its recruitment partner fails to comply with the proper determination process, they could face substantial financial penalties. Remember that the appeal of immediate cost savings often masks the far greater long-term risks of non-compliance.
Conduct regular audits
Establishing initial compliance is only the beginning of this responsibility. Regular audits of recruitment partners are essential to verify ongoing adherence to contractual obligations.
These reviews should examine whether SDSs are being properly issued, if appropriate payment structures are maintained, and whether documentation is complete and accurate.
This audit process should include clear consequences for non-compliance. While maintaining positive working relationships with recruitment partners is important, protecting the organisation from liability must take precedence. Partners who consistently fail to meet compliance standards represent a significant risk that cannot be ignored.
Beyond formal processes and contractual obligations, fostering a culture that values compliance throughout the organisation is essential.”
The complexities of off-payroll working legislation can be challenging to navigate without specialised knowledge.
Engaging with IR35 experts can provide valuable protection against unintentional breaches, provide proper determination processes, review contract structures, and identify potential vulnerabilities in your current arrangements.
Furthermore, the investment in expert guidance is minimal compared to the potential cost of HMRC penalties, back taxes, and reputational damage resulting from compliance failures.
Culture of compliance
Beyond formal processes and contractual obligations, fostering a culture that values compliance throughout the organisation is essential.
Ensure that hiring managers understand the importance of accurate status determinations and the risks associated with circumventing proper procedures.
Regular training and clear internal guidelines help embed compliance considerations into daily operations rather than treating them as occasional administrative requirements.
Moreover, to meet current HMRC guidelines, organisations affected by off-payroll working should have “robust training in place for employees who will need to understand and operate the rules”.
When engaging new recruitment partners, make compliance capabilities a primary selection criterion rather than an afterthought.
Partners who demonstrate robust compliance infrastructure and processes add value by reducing exposure to risk, even if their initial pricing may not be the lowest available.
The current regulatory environment demands vigilance from end hirers. By understanding your obligations, establishing clear requirements for your supply chain, conducting regular audits, seeking expert guidance when needed, and fostering a culture of compliance, you can protect your organisation while still accessing the flexible talent you need.
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