IR35 MythBuster #4 - Who is liable?

Fact or Myth? Agencies can leave decisions on IR35 solely to their clients without risk.

Myth. It is true that the end client is responsible for making IR35 decisions under the off-payroll legislation that came into force in April 2021. However, agencies (as the payers of the limited company) are liable for deducting tax due to HMRC.

If HMRC believes there is any tax due it will look first to the agencies for the tax. This liability may pass to the end client in certain circumstances (see below), but agencies would have to point HMRC to their clients to avoid liability which commercially may be an issue.

What is changing?

As stated above, the off-payroll legislation shifts responsibility to the contractor’s end client and/or agency (subject to the small client exemption. Clients that have no UK connection are also exempt).

These changes are similar to what we saw previously in the public sector, with some additions, such as the contractor’s right to appeal a determination.

What exactly does the client have to do?

The client has a number of obligations under the legislation, including:

• Assessing whether a role is inside or outside IR35.
• Passing on the Status Determination Statement (“SDS”) and reasons for the decision to the contractor and agency.
• Using reasonable care in making its decision on IR35.
• Responding to contractor appeals within 45 days with either a new SDS or the reasons for its original decision.
  
  

What then does the agency need to do?

Since it is the client’s responsibility to determine status, agencies might be tempted to assume they can leave IR35 to the client. But there are several reasons why agencies need to be involved:

• Clients will expect help and may even ask for indemnities.
• The legislation doesn’t say the agency simply has to follow client’s instructions: it says the agency must deduct tax if the worker is caught by IR35. So where the client has taken reasonable care to make a determination, but simply got the answer wrong the agency may be at risk.
• If HMRC starts an investigation an agency would have to convince HMRC that its client didn’t take reasonable care if it wants to pass the liability to its client. This will be commercially difficult to do whilst still retaining a good relationship.
• The scenario above can be prevented if an agency catches on to a possible mistake before the assignment is completed and final payment is made. At this point, a contractor can still appeal the client’s decision.
  
  

What if the client gets the IR35 decision wrong?

As things stand the legislation doesn’t say that a client will be liable if it gets a decision wrong. It will however be liable if it hasn’t taken reasonable care or if it fails to respond adequately to a contractor's appeal within the 45-day time limit.

There is no statutory definition of ‘reasonable care’, although HMRC has released guidance on this topic in the past. If the client has taken external advice, then it will be very difficult for HMRC to prove lack of care.

This leaves the agency (as the fee payer) as the obvious target for HMRC.

Summary

Agencies are at risk if clients make wrong IR35 decisions.

There are solid commercial reasons to provide support to your clients. Not all clients will have the in-house expertise or resources to cope with a high volume of IR35 reviews. Clients will naturally look to their agency partners for support and helping clients at this time is likely to build on your commercial relationship.

Catching any mistakes early will mean the contractor could lodge an appeal. The client will then be required to either revise its decision or provide further detail as to its reasoning, helping both the client and the agency avoid any further liabilities. If the client fails to respond adequately, it will become liable for tax instead of the agency.

Clients may also be tempted to make blanket determinations on IR35, putting all of their contractors ‘inside’ – which could result in angry contractors. An agency could play a vital role in helping its clients manage its ongoing IR35 processes and to make sure everyone in the supply chain is in the best position.

Help is at hand

PayStream have an online IR35 Review Service called IR35 Comply, which was voted the UK's Best Contractor Innovation at The Contracting Awards 2020. IR35 Comply is the product of our specialist IT development and over 14 years’ experience of reviewing assignments from an IR35 perspective. It offers a powerful combination of IT workflow systems with a human review, provided by our IR35 team. Please click here for more information.