Mergers and acquisitions: the implications for contractor IR35 compliance
Mergers and acquisitions are a fact of life in insurance, and every one of them lands on a population of contractors that nobody thought about during the deal. New management, new controls, new systems and a new legal entity can change the IR35 status of engagements that were perfectly defensible the day before completion, and in a share purchase the historic exposure comes with the company. This post is about what changes, for the buyer and the business being bought, and what to do about it. It's general commentary, not legal or tax advice; the detail depends on the structure of the deal.
Why a deal changes IR35 status
IR35 status rests on the working reality of each engagement: who controls the work, whether a substitute would really be accepted, whether there's an obligation to keep offering and accepting work, who carries the risk. A merger changes the working reality even when nobody touches a contract. A contractor who reported to a founder now reports to a group head of function. Project scopes are redrawn. Equipment and security policies are harmonised. Substitution that was tolerated in a small firm is unthinkable in a large one. Each of those shifts an engagement towards employment, and an engagement that was outside IR35 in January can be inside by June with the same person doing the same job. The signs an engagement is inside IR35 don't change; the facts underneath them do.
Three things the deal itself changes
Who's responsible: The small-company exemption is judged at group level. A small insurance business whose contractors' own companies decided their status can, on joining a large group, stop being small for off-payroll purposes, and from the relevant tax year the responsibility for every status decision moves to the business. How IR35 impacts the way you hire contractors explains the small-company test; the point here is that the acquisition can flip it.
Whose determinations they are: A status determination statement belongs to an engagement with a specific client. If contracts are novated to a new entity, or the acquirer becomes the client in practice, the old determinations don't carry over. The new client has to make its own, with reasons, and issue them down the chain.
Whose liability it is: In a share purchase, the buyer acquires the company and everything attached to it, including any off-payroll liability from engagements it treated as outside IR35 that HMRC later decides were inside. In an asset purchase the engagements usually have to be re-papered, which is the natural moment to re-determine them. Either way the acquirer inherits the population and the problem; the question is whether it found out before completion or after. The Natural Resources Wales settlement is what a legacy exposure looks like when it surfaces.
What the acquiring business should do
Put contractor status in due diligence, alongside the employment and tax checks that are already there: how many contractors, on what terms, with what determinations, made by whom, on what evidence, and whether any have been in post long enough to worry about. Price or protect what you find, through warranties or indemnities if the population is large. Then, after completion, review every engagement against the new working reality, issue fresh determinations where anything has changed, and record the review for the ones where nothing has.
What the acquired business should do
Before the deal, get the house in order: a documented determination with reasons for every engagement, evidence of the working practices behind each one, and a clear list of who's engaged, through what route, until when. It makes due diligence faster, it removes an argument about price, and it means the contractors you rely on aren't the first casualty of the integration. After completion, tell your contractors what's changing and when, because uncertainty about status is the quickest way to lose the specialists a transaction was partly bought for.
Where an MSP helps
Integration is when a managed service earns its keep: one view of the combined contractor population, one process for determinations and their evidence, one set of engagement and payroll routes, and reporting the new owner can actually read. An IR35 audit of the acquired business's engagements, before or immediately after completion, is the fastest way to turn an unknown exposure into a known one.
Buying, selling or integrating a business with contractors in it? Get in touch and we'll help you find out what you're inheriting. 01892 553360 | info@vermelorpo.com
This article is general commentary on the off-payroll working rules in the context of corporate transactions, as we understand them at the time of writing. It isn't legal or tax advice. The position depends on the structure of the transaction and the facts of each engagement, so take specialist advice before relying on anything here.
IR35 and M&A, answered
It can, in two ways. First, size: the small-company exemption is judged at group level, so a small business that joins a large group can stop being small for off-payroll purposes, and the responsibility for status decisions moves from the contractors' companies to the business itself, from the start of the relevant tax year. Second, identity: a status determination belongs to an engagement with a specific client. If contracts are novated to a new entity, or the acquirer becomes the client in practice, the new client needs to make and issue its own determinations rather than inheriting the old ones. Both points depend on the structure of the deal, so treat this as the shape of the issue and confirm the detail with your advisers.
Yes, for any engagement where the client entity, the contract or the working arrangements have changed, and it is safer to review all of them. A determination made on the old business's working practices does not survive a new reporting line, new control over how the work is done, new equipment policies or a new approach to substitution, even if the contract wording is untouched. The practical approach is a post-completion review of every contractor engagement against the working reality, a fresh status determination statement with reasons where anything has changed, and a record of the review for the ones where nothing has.
In a share purchase, yes in effect: you buy the company, and its historic tax exposures, including any off-payroll liabilities from engagements it treated as outside IR35 that HMRC later decides were inside, come with it. That is why contractor status belongs in due diligence alongside the usual employment and tax checks, and why buyers negotiate warranties or indemnities to cover it. In an asset purchase the position is different and the contractor engagements themselves usually have to be re-papered, which is the moment to re-determine them. Either way, the acquirer inherits the population and the problem; the only question is whether it found out before completion or after. This is general commentary, not legal or tax advice.