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IR35 MythBuster #2 - what happens if a client deliberately misleads an agency?

Julian Ball

Julian Ball | Legal Director

Tuesday 9th Apr, 2019

Fact or myth?

If the client deliberately misleads an agency on IR35 status the client bears the tax risk.

Fact. The client is required to take reasonable care when deciding an IR35 status. If a client deliberately misleads an agency, it will fail the test of reasonable care.

Only 53% of people recently polled believed this was true. Under the current legislation, public authorities are required to exercise reasonable care in providing their views on IR35. An authority that fails to exercise reasonable care can be held liable. This requirement will be rolled out into the private sector April 2020.

Where are we now?

The consultation on “off-payroll working rules from April 2020” was published on 5th March 2019. The proposals are broadly similar to the public sector, however there are some key developments which will apply equally to public sector engagements from April 2020.

Information exchange is key

The client still needs to make an assessment on whether a role is caught by IR35 and pass this information down to the agency. If there is a chain (for example, an MSP type situation) each agency in the chain will need to pass information down. Failure to do so can make that agency liable. The contractor will also be entitled to ask the client for information on IR35 status.

Liability may pass up the chain

Provisions around liability are also expected to change. The fee payer (agency) still has responsibility for deducting the tax but liability may pass up the chain if other parties don’t fulfil their obligations. If for example the fee payer does not pay HMRC then HMRC can go up the chain to the agency nearest the client and ask for the tax.

Liability could also go up to the client if there is no-one else that is solvent to chase. In the public sector, as long as the client has taken reasonable care it is off the hook. This will no longer be the case from April 2020. However, HMRC will only go after a client that has taken reasonable care as a last resort. HMRC justifies the above by saying it will make clients and agencies only work with “reputable and compliant firms”. As a result we are likely to see a lot more focus on a compliant supply chain.

Contractors can challenge IR35 decisions

The consultation also introduces a client-led status disagreement process. HMRC expects end clients to put in place a mechanism to allow a contractor to challenge a decision. There may not be any legal sanction for failure to do so, but HMRC is looking for ideas on how this may work from the consultation. HMRC thinks this will prevent blanket determinations that happened in public sector.

Help is at hand

We’re out in the field constantly talking to recruitment businesses and supporting client visits and we’ve also rolled out a number of free webinars. We recommend you start your preparations early, which will put you in a good position by April 2020. Our Compliance Team is very experienced in determining IR35 status. We are due to roll out our new IR35 portal shortly to assist in the expected increase in volume; although, we do currently work to a 24 hour turn-around!

We also have an experienced New Business and Agency Support Team who’ve been through the public sector changes and are well placed to quickly convert or onboard contractors to umbrella where required. Our umbrella company is award winning.

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Related articleIR35 MythBuster #1 - What happens if a client says an assignment is outside IR35?

In April 2017, there were major changes to how IR35 is operated in the public sector. Historically, the contractor supplying his company’s services to a client was responsible for determining whether IR35 applied to the assignment. However, from April 2017, this responsibility shifted to the client, with the agency (as the fee payer) becoming responsible for deducting tax from payments to the PSC if IR35 applied. 

Read more here
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