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The “Off-payroll working” legislation was introduced in the private sector in April 2021.
The legislation means that the responsibility for determining a contractor's IR35 status has now moved to the end client, with the person paying the PSC (usually the agency) being responsible for deducting the necessary tax, if IR35 applies.
In short under the legislation agencies need to ensure that they don’t pay PSCs gross if the contractor is ‘caught by IR35’.
The end client needs to confirm to the fee payer (the person paying the PSC) whether the role advertised is inside or outside IR35 and there are practical considerations that can be factored in when determining an IR35 status. They must also take reasonable care in making their IR35 status determination.
If inside IR35, the recruitment agency will not be able to pay the PSC gross but will have to deduct employed levels of tax from the payments to PSCs (or perhaps refer the contractor to an umbrella company, like PayStream My Max).
Where the end client or agency believe that the role is "caught by IR35" they are likely to see a decrease in net pay by about 15%. This is because the fee payer, will have to deduct employment taxes before paying the PSC.
The obligations include:
The legislation doesn’t say that a client will be liable if it gets a decision wrong. If the client has taken reasonable care but just got it wrong, the client will not be liable but the agency (as the fee payer) might.
Where a client is classed as small as per the Companies Act, it is exempt from the rules. In this scenario, the contractor must decide their own IR35 status. The fee-payer is also off the hook since the contractor is responsible for PAYE and NICs.
A client qualifies as small if it meets two or more of the following requirements:
There is a new statutory client-led disagreement process. If the contractor or agency don’t agree with the SDS, they can make this representation to the client. The client then has 45 days to either inform the contractor that the SDS is correct or, to issue a new SDS. If the client fails to comply with this process, it becomes the fee-payer.
We can’t advocate strongly enough the importance of agencies, clients and contractors working collaboratively in making considered and informed decisions on IR35.
And as usual PayStream are here to help with our IR35 Review Service – IR35 Comply. Our online portal is not only quick and easy to use but all answers provided are reviewed by a team of experienced IR35 professionals. This human intervention allows us to paint a picture of the overall working circumstances of the role before determining an IR35 status. It’s this independent specialised review that satisfies the reasonable care requirement and can protect you from future claims.