IR35 Assessments: Contractual Reviews

by | Feb 8, 2021 | Agencies, Blog, Featured, IR35 & Off-Payroll, News

IR35: The Importance of Reviewing Contracts Throughout The Supply Chain

When it comes to determining whether an assignment is ‘inside’ or ‘outside’ IR35, you must consider both the working practices and the contracts throughout the supply chain.

As we move further into 2021, you (the agency) in coordination with all your clients need to begin conducting status assessments, and issuing status determination statements on all your active assignments (contractors) in preparation for the implementation of the new IR35 legislation (if you haven’t begun doing so already). This is important to ensure you don’t expose yourself to financial risk when the reforms are implemented on April 6th 2021.

For every assessment you carry out, you must be able to prove that you have taken ‘reasonable care’ and have looked at all the important considerations, including:

  • Mutuality of Obligation – are the end hirer and contractor obligated to one another on an ongoing basis?
  • Right to Substitution – can the contractor substitute themselves for a suitably qualified and experienced replacement?
  • Control – can the end hirer control how, when, and where the contractor works?
  • Financial Risk – can the contractor suffer financial loss in the event of unsatisfactory or late delivery of a project?
  • Behaviour – does the contractor behave like an employee? Are they on the holiday rota or in the employee performance management system?

In addition to the contractor’s working practices, however, it is vital to consider the contracts in the supply chain as well because these can have a big influence on the assessment outcome.

The impact of appropriate contracts

Ensuring that the IR35 status of an assignment is consistent when considering both the working practices and the contractual agreements between the PSC and the client is essential. If there are inconsistencies between the contract and the working practices, depending on the circumstances, this could open your agency and end client up to financial risk.

For genuinely ‘outside’ IR35 contractors:

Where a review of working practices is undertaken and indicates that a worker is providing services to a client in a genuinely ‘self-employed’ (‘outside’ IR35) capacity, the contracts in the supply chain must be consistent with these working practices.

For example, where a review of working practices confirms that the degree of control exercised over a worker is inconsistent with an employment relationship (i.e. the engagement is ‘outside’ IR35), but an inappropriate contract exists in the contractual supply chain which provides a degree of control which is strong over the worker, then the contract alone may increase the risk of bringing the engagement within IR35, even though working practices indicate otherwise.

Therefore, it is important, when assessing IR35 status, to consider the contracts for any engagements where a review of working practices indicates an ‘outside’ IR35 status. Identifying these inconsistencies will allow you time to amend any contractual terms where necessary, to ensure you can keep engaging with contractors on an ‘outside’ basis, and minimise your financial risk.

For ‘inside’ IR35 contractors:

Where a review of working practices indicates that a worker is providing services to a client which are more consistent with an employment relationship (i.e. ‘inside’ IR35), the situation is slightly different.

In this scenario, a review of contracts throughout the supply chain would not be required for ensuring consistency with working practices. However, it may be necessary for you and your clients to review contracts in the chain for other commercial reasons, such as amendments to charge rates for ‘inside’ engagements or perhaps to review the warranties and indemnities detailed within them.

How we can help

No matter how far into the assessment process your agency is, we can help you conduct compliant assessments, review contracts, and communicate strategically and effectively with all parties in the supply chain to mitigate risk for everyone. To find out more about how we can help your agency with IR35, please click here.

JSA Group

Specialist outsourced accountancy and payroll services for recruitment agencies, freelancers, contractors and umbrella workers. We’ve built up expert knowledge and experience within the industry by supporting tens of thousands of customers for 30 years.

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