How clients and agencies can manage tax risk under Off-Payroll


The introduction of the Off-Payroll legislation, which will apply to the majority of contract engagements in the private sector from April 2021, means that the agency and hiring firm are now HMRC’s primary and secondary targets for the recovery of backdated tax, penalties and interest. This tax liability risk only exists where a contractor has been assessed as ‘outside IR35’.

The legislation places particular emphasis on ‘reasonable care’, which will then determine whether the client or agency is liable for the tax, due to provisions in section 61NA(2) of the legislation. This essentially requires that hiring firms consider all the necessary factors when assessing a contractor’s status. The fact that reasonable care has been taken also needs to be demonstrated through the provision of a Status Determination Statement (“SDS”), which must also contain reasons for the determination, as per section 61NA(1)(a).

The requirement for a valid SDS is not met if the hiring firm fails to take ‘reasonable care’ in reaching its conclusion, in which case they assume the role of ‘fee-payer’, meaning if HMRC later investigates then the client will be liable for any unpaid taxes.

Are agencies at risk?

In “outside IR35” situations agencies only become exposed to future tax risk if the client has taken reasonable care, and passed them a valid Status Determination Statement (see section 61N(5)) which indicates the status is “outside IR35”.

HMRC would then need to open an enquiry, agree reasonable care was taken, but disagree with the status outcome, and then convince a judge at a tax tribunal they were right, against the backdrop of all other parties and witnesses to the case providing evidence to the contrary.

This is quite the challenge for HMRC, who have lost the majority of IR35 cases in the last 20 years against a backdrop of the supply chain taking a more lackadaisical approach to matters. The “new normal” of Off-Payroll is seeing a considerable tightening up of contractual paperwork and working practices, making HMRC’s ascent of this mount improbable even more difficult.

So, whilst it is theoretically possible, it is highly unlikely that a knowledgeable hirer who has taken reasonable care has got the determination wrong and exposed the agency to tax risk.

Once HMRC enforcement starts, compliance officers will be focusing their limited resources on easy pickings - hirers who have taken a more lip-service based approach to compliance and are unlikely to have met reasonable care.

Do agencies and clients need insurance?

Off-Payroll compliance isn’t an issue that can be simply circumvented via an insurance policy and it’s important to remember that firms cannot insure against the non-payment of tax, in the same way that you cannot insure against a speeding ticket.

Clients and agencies who are concerned about the possibility of being struck by the equivalent of tax lightning should at least have tax investigation insurance, which most businesses do, to help cover the costs of defending their position if lightning does strike.

For further security, it is possible to purchase tax liability cover, to cover a percentage of the total tax exposure, depending on appetite to risk. Different cohorts of contractors will carry different levels of risk and exposure. This is like insuring a fleet of Ferraris compared to a fleet of Minis, and the insurance should be priced based around the measured reality for each situation. One size fits all approaches don’t make commercial sense.

Be forewarned though, these types of insurance policies will rarely compensate where the claimant hasn’t fulfilled their own compliance obligations, nor will an insurance policy remedy the stress and reputational damage that a firm suffers when being dragged through the tax tribunals. It is therefore crucial that any insurance product is underpinned by a robust compliance process.

Prevention is better than cure

Adopting a compliance-led approach is the only way to meet the reasonable care requirement and offer the best protection in the event of an HMRC enquiry.

The best way clients and agencies can protect themselves from the administrative cost and reputational damage from being involved in incorrect determinations and subsequent litigation by HMRC is to play their part in the IR35 compliance process.

As the saying goes, “prevention is better than cure.”

IR35 Shield

IR35 Shield is the cloud-driven industry leading IR35 compliance standard for business and individual contractors.