IR35 Tax Loss Insurance: Are Recruiters Holding a Ticking Time Bomb?

Recruiters or MSP’s seen to be promoting IR35 Tax loss insurance are leaving themselves vulnerable to the MSC legislation, giving rise to huge liabilities and even insolvency risk.

A worrying trend

In recent Client work, I’ve reviewed several Contracts from both Recruiters and MSP’s that have made the purchase of tax loss insurance a condition of working outside IR35 (Off-Payroll legislation).

This is akin to promoting the insurance, crucially satisfying two criteria of the MSC legislation and placing the Recruiter or MSP in the firing line for a significant liability. There are solutions to the IR35 headache for Clients and Recruiters, tax loss insurance isn’t one of them.

As a matter of law, the fee-payer (usually the Recruiter) is responsible for any underpayment of income tax and National Insurance contributions if HMRC successfully challenges an outside IR35 determination.

Recruiters have sought to mitigate this risk by requiring contractors to indemnify this liability via a tax loss insurance policy.

Ethics aside, this practice is fraught with legal risk which may be unclear to the non-legally trained IR35 advice community and their clients.

Why the MSC Legislation is so important

Here’s the key legal points, it’s a little dry, but it’s important, so please read on.

The Managed Service Companies (MSC) legislation can be found in Chapter 9 of the Income Tax (Earnings and Pensions) Act 2003.
An MSC provider is ‘a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals’, for example, a Recruiter or MSP.

Providing recruitment services in isolation is fine, there is an exception made for Recruiters in section 61B(4). Unfortunately this exception is then removed if the MSC provider ‘gives or promotes an undertaking to make good any tax loss’ by virtue of section 61B(5)(a).

In very simple terms, if a Recruiter or MSP either promotes or requires tax loss insurance to be taken out by the Contractor, they are putting themselves in harms way of the MSC legislation.

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Risk Assessment

What Type of Organisation are you?(Required)

End client (Hirer)

Recruiter or MSP

Contractor

This assessment is designed for the hiring client only, the questions do not apply to Recruiters or Contractors.

IR35 Pro provides a fully managed service for IR35, exceeding HRMC compliance standards and enabling our clients to gain a competitive edge.

Find out more about us on our website.

What size organisation are you?(Required)

£0-10m Revenue

£10-50m Revenue

£50m+ Revenue

Good news, you fall under the small companies threshold and therefore are not responsible for IR35.

Approx how many contractors does your company use annually? (whether inside or outside IR35)(Required)

Please enter a number from 1 to 5000.

What is the average day rate for your contractors? (approx)(Required)

Please enter a number from 100 to 1500.

What % of your contractors are currently engaged outside IR35, via their Limited Company?(Required)

Please enter a number from 0 to 100.

Do you produce a Status Determination Statement (SDS) for each contractor assignment?(Required)

Yes

Sometimes, but it's a little ad-hoc

Do you have IR35 Tax Loss insurance in place to cover your SDS assessments?(Required)

Yes it's included as part of the SDS assessment

How do you produce the Status Determination Statement (SDS)?(Required)

HRMC CEST tool

Other software or survey tool

No software or survey tool used, we perform manual assessments

Do you have access to any legally qualified IR35 experts?(Required)

Yes, we have in-house legal experts on IR35

No, we don't have access to any legal IR35 experts

Yes, we use external IR35 legal experts to assist

How directly involved are the IR35 legal experts in your management of IR35?(Required)

Their role is to provide IR35 Policy guidance only, they don't have any further involvement

Legal are involved in each IR35 assessment for the contractors we hire

Legal are involved in the IR35 assessment, contract drafting and also the contract schedule for each contractor

Legal are involved in the contract drafting and contract schedule, but not the IR35 assessment

Who provides the details of the assignment for the Status Determination Assessment?(Required)

A central administrator (e.g. HR) completes the SDS assessment for each contractor

The hiring manager completes the SDS assessment for their contractor

The recruitment company completes the SDS on our behalf

For contracts outside IR35: Do you produce a detailed Statement of Work (SOW) for each contractor engaged outside IR35?(Required)

Yes, we produce a detailed SOW for each assignment

Sometimes

For contracts outside IR35: What is the typical length of termination notice in the Contract?(Required)

1 month

2 weeks

No notice, the contract automatically ends when the work is delivered

7 days

For Contracts outside IR35: What happens if there are scope changes identified during the assignment?(Required)

Nothing, as long as both the hiring manager and contractor are happy to work on the new deliverables

We have a strict change control process in the event of any additional work, requiring a new SOW schedule to be drafted and signed

For contracts outside of IR35: What happens if the contractor is required to continue beyond the initial term?(Required)

Nothing, the contract allows for the engagement to continue as long as required

A new SOW is drafted and signed for each extension of contract

For contracts outside IR35: What visibility do you have of all the contracts in the Supply Chain?(Required)

We have visibility only of the contract between us & the recruiter

We have visibility of BOTH the contracts between us & the recruiter (upper level) AND between recuiter & contractor (lower level) to ensure they are mirrored and consistent

Have your hiring managers received any formal training or education on how to work compliantly with their contractors outside IR35?(Required)

Yes