As we get nearer to the implementation of Off-Payroll in the private sector, the onus is on hiring companies to decide what strategy they will pursue in terms of making IR35 determinations on contract assignments. In some respects, the interpretation of the legislation that underpins this decision can be as simple and straight forward, or as complex and nuanced as the hiring company chooses it to be. So realistically, what are the client’s options?

1 – The Outsource

Businesses outsource functions all the time. As a business owner I am no stranger to this and can imagine that the first instinct for many hiring companies might be to consider how the Off-Payroll ‘hot potato’ can be passed on to someone else. Of course, this may create an opportunity for consulting businesses or even groups of contractors to club together to become an outsourcing organisation. However, HMRC is clear that the process of outsourcing recruitment is not enough to divest responsibility under Off-Payroll.

The outsource option will only pass muster if the hiring company outsources an entire project or scope of work, and the ramifications of making such a decision go far beyond resourcing. Whilst there are certainly advantages to outsourcing projects, many companies choose not to for reasons of cost and control. 

Outsourcing therefore may well form part of the solution for some companies, provided other (and probably more fundamental) considerations regarding cost and control are taken in to account. For this reason it doesn’t seem like an obvious or straight-forward strategy. HMRC will also surely be on the alert for any companies that attempt to conceal what is actually a piece of recruitment under the mask of outsource.

2 – The Blanket Ban

If the implementation of Off-Payroll in to the public sector is anything to go by, then the ‘blanket ban’ may well be a route that some companies take. That is to say, a wide ‘inside of IR35’ net will be cast over the hiring company’s contractor pool as a means of the hiring company avoiding being on the hook for ‘outside of IR35’ determinations that are ultimately found to be incorrect.

The problems with the blanket ban are threefold. Firstly, HMRC states that in making a determination on a contract assignment, hiring companies must take ‘reasonable care’. Blanket-banning hardly suggests that reasonable care has been taken (although it’s not clear what the consequences might be in this context)

Secondly, contractors experiencing a regime of blanket banning are likely to be aggrieved, so hiring companies can expect determinations to be challenged. This in turn means that hiring companies must be ready and able to submit information on how and why they made each and every determination.

Thirdly, there are the financial ramifications. We know that a limited company being treated (for tax purposes) as an employee is going to suffer a serious reduction in net pay, and is therefore likely to request a rate increase in order to bridge the gap. Even if the hiring company holds firm and refuses to increase rates, there’s also the thorny issue of employer’s NI. A limited company treated for tax purposes as an employee cannot be responsible for the payment of employer’s NI, and the Treasury has suggested as much. So who pays for this? Not the recruitment agency (if one is involved) as quite often the recruitment company’s margin is less than the rate of employer’s NI anway….so realistically this can only be covered by the client, meaning that the blanket ban comes at a cost. The only possibility of avoiding that cost would be for the hiring company to declare a rate decrease and reduce the contractor’s rate by the amount of NI to be covered, which would be somewhat Machiavellian to say the least, and would create even more pain and grief for the contractor.

To take the blanket ban route, the hiring company may simply be exchanging one perceived risk for another…the risk of being ‘on the hook’ for making the wrong determination for the risk of costs rising or contractors voting with their feet and leaving for warmer waters. There is also surely a reputational angle here: in any contracting industry there are always some hiring companies that are considered to be ‘better places to work’ by contractors than others. Clearly a hiring company with such a hard-nosed policy on Off-Payroll is not going to be high on the list for any contractor seeking a client.

3 – Go with the Flow

OK, the heading may be a little glib, but the final major option would be to do precisely what HMRC is asking hiring companies to do, which is to treat every contract assignment on its merits and reach a well-considered determination on whether that assignment falls within IR35 or not. Any hiring company that takes ‘reasonable care’ in making a determination eliminates its risk in being treated as the ‘fee payer’ by HMRC. 

So what constitutes ‘reasonable care’? So far HMRC has not provided a definition on this and one suspects that this is a strategic decision…the more doubt there is in the hirer’s mind, the more likely they are to determine the assignment as ‘inside’, meaning more tax to be collected by the Treasury. 

Practically speaking, I would anticipate ‘reasonable care’ to be a combination of the following:

  • Creation of a defined, documented process for hiring contractors.
  • Use of the CEST tool (much maligned, but it is at least HMRC’s own tool for making the determination) plus any additional external test that shows that the criteria of IR35 has been considered in making the determination.
  • Bottlenecking of the recruitment process to a small group of hiring managers who have been trained in the legislation and can therefore demonstrate competence in making a robust determination.
  • A services requisition document that replaces the traditional job-spec, that can be shared with the supply chain, and outlines the services required, the IR35 determination and why/how that determination was reached.
  • A documented auditing process that analysis contract assignments after a period of time to ensure that the original assignment determination is still fit for purpose.

If the hiring company can demonstrate reasonable care in making the determination, then even if an outside of IR35 determination is made and subsequently successfully challenged by HMRC, the hiring company will not be treated as the fee payer and liable to pay the shortfall in tax. 

Of course, in following this route to make ‘outside determinations’ on assignments, hiring companies don’t just need to have a robust hiring policy, they also need to ensure that the reality of the assignment matches with the determination. Whilst most of the clients that I have spoken to are aware of the ‘IR35 fundamentals’ of personal service (substitution), supervision and control, mutuality of obligation and part & parcel, many have also admitted that there are at least some grey areas when it comes to the day-to-day reality of the contract. This is to be expected, but on the bright side, there is still time to make sure the required daylight between employment and self-employment is achieved between now and April.


Occasionally businesses have to make a choice between a series of options, none of which are entirely palatable because they increase risk, cost, effort, time, or maybe a combination of all four. Ultimately, Off-Payroll will test how hiring companies balance these factors against each other and prioritise. 

Ultimately however, whilst the IR35 and Off-Payroll legislation is undoubtedly complex, the premise is fairly simple: is the contractor in disguised employment or not? If hiring companies engage with limited company contractors the way they were always meant to, then they should have little to fear in determining them to be outside of IR35. This may yet be the path of least resistance.