Recruiters urged to campaign for single-sentence fix to IR35 statute

Recruiters are being urged to campaign for a single-sentence fix to the IR35 statute by contracting authority ContractorCalculator.

The organisation cites “gross tax unfairness” of the statute as having a negative impact on recruitment businesses.

Currently, a recruitment agency could get landed with another firm’s “crippling” tax bill, “even though they did nothing wrong”, due to an accidental flaw within the legislation, ContractorCalculator alleged.

Legislative changes introduced in April 2021, as part of the rollout to the private sector, included the concept of a Status Determination Statement (SDS), which is a document the hirer can create and pass to the worker and other parties in the supply chain, for example, a recruitment agency. An SDS must state the IR35 status and reasons for reaching that conclusion.

The SDS was designed for ‘inside’ IR35 assessments, ContractorCalculator said, triggering the statutory requirement for the earnings to be taxed like employment and the agency liable for doing so.

“And it made sense to prevent unscrupulous agencies from ignoring the IR35 status and instead paying gross to the contractor,” ContractorCalculator noted in a statement.

However, due to what ContractorCalculator has called “poor drafting” in section 61N(5), any ‘outside’ IR35 SDS passed to the agency also means that if HMRC later intervenes, the agency is still liable for the tax bill, “even though it never made the wrong status decision in the first place, and neither does it have the money to pay”, ContractorCalculator said. “This absurdity could easily make a small agency bankrupt.”

ContractorCalculator is proposing that Parliament could amend the legislation to fix this glaring error by adding a “straightforward” sentence in section 61N(5) whereby the tax risk is only moved to the recruiter if an ‘inside’ SDS is passed to the worker.

The sentence suggested for 61N(5) is, with the proposed amendment in underline: “Unless and until the client gives a status determination statement to the worker (see section 61NA), which states that the client has concluded that the condition in section 61M(1)(d) is met in the case of the engagement and explains the reasons for that conclusion, subsections (3) and (4) have effect as if for any reference to the fee-payer there were substituted a reference to the client; but this is subject to sections 61V and 61WA.”

“The effect of doing so would mean that firms with a less than robust assessment regime will no longer be able to rely on an agency picking up their tax bill simply because they pass an SDS to the worker. Recruiters would finally be protected as they should be and stop worrying about draconian tax laws,” ContractorCalculator said. 

In March 2023, ContractorCalculator ran a mini-campaign titled ‘Fix-or-ditch’, which sought to persuade ministers to either ditch the IR35 Reforms entirely or fix three structural flaws:
1. Double-taxation
2. Tax injustice for recruiters
3. Toothless appeals

Dave Chaplin, CEO of ContractorCalculator, said: “Parliament is reportedly resolving the issue around double taxation in the next Finance Bill, which will be retroactive from April 2017.

“Whilst the appeals process looks to remain toothless, there is potential scope, whilst the legislative bonnet is being opened, to fix the tax injustice facing recruiters.

“I would urge recruiters to speak to their trade bodies and campaign by writing to their MPs, asking for this amendment to help unstick the flexible workforce and facilitate growth,” Chaplin said.

Recruiters can locate their MP here.

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