Fact or myth?
If a client says the assignment is outside IR35, there is no risk to the agency if it pays the contractor’s PSC gross.
Myth. It is the agency’s responsibility to deduct tax from payments to the PSC if the PSC is caught by IR35.
Background
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. HMRC introduced a new online tool to help check employment status for tax, known as “CEST” and public body clients were encouraged to use the tool by HMRC to provide guidance on IR35 status.
We now know that from April 2020, these changes will be applied to the private sector for all but the smallest clients. Legislation is expected in summer 2019.
The legislation
First off, we’ll take a closer look at what the public sector legislation says (and we’ll assume for now that the private sector legislation will be the same). The legislation can be found in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
Under S61N(2) of Chapter 10, the responsibility for making relevant deductions of PAYE and national insurance (NI) (and paying them to HMRC) falls on the “fee payer.” Since the fee payer is the person in the chain immediately above the PSC this is usually the agency.
HMRC’s guidance backs this up:
“Off-payroll working in the public sector” moves the responsibility for deciding if the off-payroll rules for engagements in the public sector apply from an individual worker’s intermediary to the … party paying the intermediary. The measure makes this party responsible for deducting and paying the associated employment taxes and NICs to HM Revenue and Customs (HMRC).”
This responsibility only moves to the client (under S61T) if it hasn’t met its own obligations under the legislation. These obligations are:
- to assess whether a role is inside or outside IR35
- to let the agency know its decision when asked
- to use reasonable care in making its decision on IR35
The legislation doesn’t say that a client will be liable if it gets a decision wrong. Realistically an agency would have to point a finger at its client and say to HMRC that its client did not take reasonable care and hope that HMRC follows this up. It might be that in fact the client has taken reasonable care (using for example the CEST tool) but just got it wrong.
We have not yet seen enforcement in the public sector so HMRC’s approach is not confirmed, but logically HMRC will look to get the money from the easiest place, which may be the agency.
Take another scenario: the client decides to make a blanket decision that IR35 applies to all contractors. We experienced this in the public sector. In this scenario, an agency may argue that the client obviously failed to take reasonable care in determining IR35 status, and yes, is liable. But in that scenario there is no tax risk as presumably the PSCs have not been paid gross. The more pressing issue will be a lot of unhappy contractors on your hands.
We can’t advocate strongly enough the importance of working collaboratively with your clients (and contractors) in making considered and informed decisions on IR35. Don’t rely on your clients tripping up. Providing your clients with support and help during this transition will likely endear them to you commercially and help you solidify and build on your existing relationships.
Steps to take now:
- Talk to your clients. What do they know about the changes coming in April 2020? Have they started to make plans?
- Educate your clients. Blanket assessments did not go down well in the public sector and are already being challenged.
- Don’t leave it too late. Start analysing your contractor base and basic information like rate and service title. Move those that should not be in a PSC sooner rather than later and have an expert review the remaining base ahead of April 2020.
- Talk to your contractors. We recommend that you keep your contractors up to date with your progress and plans going into April 2020. A lot of complaints in the public sector came from contractors confused over their rates and the future of their PSCs. By keeping them well informed, they are more likely to understand and get on board with any change (although we can’t guarantee everyone will be happy!)
Help is at hand
We’re out in the field constantly talking to recruitment businesses and supporting client visits. The sheer volume of contractors will make this difficult for everyone to manage, but starting your preparations early, 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.
