In this article, 'recruitment agency' includes employment businesses.
The parties in a typical off-payroll labour supply chain will of course include the client at the top, usually followed by a recruitment agency sitting between the client and the personal service company which provides the services of the contractor. Under the new off-payroll regulations, the client will have made a status determination statement (SDS) and provided it to the contractor and the agency. If that SDS deems the assignment in the aforementioned supply chain to be inside IR35, the agency will be responsible for making employment tax deductions and will serve as the deemed employer for such purposes.
It is anticipated that recruitment agencies will have to deal with situations involving dissatisfied contractors where the SDS provides that an assignment is caught by IR35. Provided that the SDS is passed to the agency, the agency must make employment tax deductions. If they fail to do so, they may face claims from HMRC for unpaid taxes including employer and employee national insurance contributions, interests and penalties.
If there are multiple agencies involved in the labour supply chain, each agency will be obliged to pass on the SDS to the next ranking agency or fee payer in the chain. Each recipient of the SDS is responsible for forwarding on that decision to any third party in the labour supply chain.
Where an offshore recruitment agency is involved, there will be no obligation on the part of that agency provided it is based overseas and has no connection with the UK in terms of residency or permanent establishment to make employment tax deductions. However, any offshore agency involved in the labour supply chain will be obliged to pass on the SDS to any other agencies in the supply chain.
If a recruitment agency is caught up in a dispute between a contractor and the client concerning the outcome of an SDS, the contractor will need to persuade the client using their knowledge of the supply chain and nature of the assignment to determine whether the client has undertaken "reasonable care". Unfortunately there is no statutory definition as to what amounts to "reasonable care" other than references in HMRC guidance which defines it as acting in a way that would be expected of a reasonable and prudent person in the hirer's position.
Ultimately, if the client does not take into account any representations made by the agency, the agency cannot appeal the outcome of any SDS - that is a matter for the contractor.
It will be a brave agency that fails to deduct employment taxes where it is the recipient of an SDS confirming that the assignment is caught by IR35.
Agencies will need to keep fully informed as to the progress of any appeal by a contractor and consider whether "reasonable care" has been taken by the client when reviewing its decision. Failure to take reasonable care will leave liability for deducting taxes with the client. However in any event, recruitment agencies will probably want to make employment tax deductions for fear of being pursued for employment taxes, as a precaution.
If a client changes their decision on an SDS from an assignment being caught by IR35 to being outside IR35 and the agency has concerns, it may wish to seek an indemnity from the client in appropriate circumstances, as part of the terms upon which it supplies the contractor and the personal service company to the client.
In short, upon receipt of an SDS confirming that the assignment is inside IR35, recruitment agencies should: