IR35 has been a contentious issue for many ever since it was introduced. However, even after a few years, misconceptions about the importance of staying compliant and the risks of neglecting it still persist.
Whether intentional or not, cutting corners on compliance is common across all businesses. It is particularly prevalent when regulations are relatively new and subject to frequent change. With IR35 being one such example, it is often difficult to keep up with, and many companies fail to conduct proper due diligence or stay fully informed and thorough. Nonetheless, this is one area where full compliance is essential.
The stakes are high. If caught non-compliant with IR35, you will need to pay in full any accumulated backlog. Additionally, in various circumstances, you may incur interest and further penalties. All that said, a simple oversight of a minor detail can cost you your entire business.
Who is Responsible for IR35 Compliance?
The short answer is the end client. However, the responsibility often lies with the recruitment agency as the fee payer. This is often because, in this field, recruiters tend to be more familiar with IR35-related issues than companies that hire contractors for standalone projects.
Which of the two is responsible generally depends on the parties' agreement. Some recruitment agencies, particularly those that do not offer contractor management as part of their usual services, are firm on not getting involved in IR35 to avoid being held liable if something goes wrong.
Financial Risks for Clients and Organisations
As we’ve already established, either the client or the recruitment agency is responsible for IR35 violations. This means that they will bear the cost. While this might not seem as threatening, especially for larger, well-established companies, the financial risks involved are actually significant.
Liability for Unpaid Tax and National Insurance
The biggest risk of incorrect IR35 rulings is having to pay back unpaid tax. Usually, the mistake is only discovered months or even years later, creating a large backlog that can easily push companies towards bankruptcy. Blanket inside determinations, poor due diligence, and various other scenarios can occur, all leading to the same outcome. And if that’s not enough, interest and penalties may also apply. For example, if the owed tax cannot be paid within the original timeframe, any overdue amount will accrue interest. While you may spread the payments, you will eventually pay more than you originally owed. Furthermore, HMRC may impose penalties depending on the behaviour involved—specifically if they judge the breach to be careless rather than intentional.
Naturally, even if the error was accidental, the business won’t be spared from its accumulated debt. And, with IR35 still in its developmental phases, many aspects remain unclear, exposing businesses to multiple risks of misstep. The ways to minimise these risks include using IR35-optimised tools aligned with compliance and working with certified IR35 consultants.
Cost of Rectifying Mistakes
Besides paying off debts, interests, and penalties, non-compliant companies are incurring another cost: rectifying their mistakes. While they are penalised through fines and sanctions, businesses will not be permitted to continue operations unless they ensure compliance with legal requirements in the future. It is also in their best interest to do so, as repeated violations will lead to harsher penalties.
What makes correcting errors almost as costly as leaving them unfixed is the number of moving parts involved and the hours of labour required. From administrative hurdles to professional fees, additional costs are likely to arise, such as the need for specialised software. Additionally, processes like re-contracting, while incurring costs, can also disrupt the company’s established workflows, potentially negatively impacting their revenue or even halting it entirely. Overall, it’s best to make an initial investment to get things right from the start.
Operational and Business Risks
If the above didn’t convince you that IR35 compliance is essential and that failures can result in significant costs, don’t worry. There is more to consider. Even after settling the initial debt, interest, and penalties, your business may face additional indirect costs. Some of these are long-term.
Project Delays or Staffing Gaps
Incorrect determinations can cause contractors to leave mid-project. Needless to say, that disrupts the flow and can bring the whole project to a screeching halt. Not only does this put you in hot water with the clients, but the issue isn’t as simple to resolve either. Simply put, finding a replacement is half the job done - and, depending on the nature of the project, that may not be an easy task. Getting them up to speed in the shortest time without sacrificing quality is the real challenge.
Despite its size, the contractor market is tightly knit, and wrongful IR35 decisions or mid-project walk-outs can have long-term effects. Specifically, news spreads quickly. Moving forward, if you are flagged as a non-IR35 compliant agency, you may struggle to attract new contractors, leading to staffing shortages and ultimately impacting your revenue.
Increased Administrative Burden
Unclear and non-compliant processes can lead to a lot of extra administrative work. Without a clearly defined step-by-step process, the operation is likely to require multiple repetitions or be carried out less efficiently. When dealing with non-compliance, it will need to be redone, not to mention documented and corrected.
Administrative tasks are often a major culprit for wasting time and increasing human error. Given how strict IR35 regulations are, the latter can carry serious consequences. This means IR35 admin tasks require even more time and care to mitigate risks. Alternatively, they can be managed with specialised digital solutions. Automating the process not only accelerates it but also reduces the chance of mistakes.
How to Mitigate IR35 Risks
With the importance of avoiding IR35 mistakes out of the way, let’s discuss what can be done to prevent falling into trouble with HMRC in the first place. While no solution guarantees to eliminate every error, there are approaches that get very close.
Software Can Help
Although the IR35 requirements and conditions are demanding to keep up with because of their frequent changes, this does not exempt you from penalties. You have two options to defend yourself: either hire a specialist with specific IR35 training or use digital tools designed with IR35 in mind.
Needless to say, the latter is definitely more cost-effective. Especially if your business doesn’t frequently encounter IR35 issues, bringing on a new team member or paying for a third-party company involves a long-term commitment that can be costly. A one-off project and recruiting contractors, if not areas you want to expand into, will not only incur expenses but also likely prevent you from making a profit. Digital tools, although also tied to a fixed contract (typically 3-6 months or up to a year), are significantly cheaper. Additionally, most solutions offer a range of features, some of which can be used to improve other parts of the business and therefore boost overall processes. Even if you opt to hire a specialist, equipping them with suitable digital tools is a wise move. Software, particularly when regularly updated by the vendor, provides a reliable way to stay compliant without extra effort. Digital tools can also accelerate administrative tasks, minimise human errors, and identify inefficiencies.
Summary
Although challenging to keep up with, IR35 is a matter requiring full compliance. It carries a range of financial penalties when overlooked, from reimbursing unpaid taxes to facing interest and additional fines. Not to mention, correcting mistakes results in higher costs, whether through administrative work or hiring specialists to assist you in managing the situation. Investing early in ensuring your business remains IR35 compliant at all times is the safest and most cost-effective approach.
In fact, the financial losses caused by non-compliance do not stop there. Some are less obvious and can affect you in the long run. For instance, it may halt projects entirely because contractors leave. This can also harm your reputation as an agency, possibly preventing other contractors from working with you in the future. The best way to reduce these risks is either by hiring an in-house expert or using dedicated digital solutions. Combining both approaches is ideal if your company specialises in contractor management. And if this is a rare skill, software is certainly a more cost-effective option.
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Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal / financial expert in this area before acting on any of our advice.