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IR35 MythBuster #1 - What happens if a client says an assignment is outside IR35
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.
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.
In April 2021, these changes were also applied to the private sector for all but the smallest and non-UK based clients.
First off, we’ll take a closer look at what the public sector legislation says. 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
to deal with appeals against its decision
Technically, the legislation doesn’t say that a client will be liable if it gets a decision wrong. There is however a safeguard against client error in the form of an appeals process. At 61T, the new legislation states that the client is required to respond to any appeals from the contractor or the deemed employer if they disagree with the SDS provided. In this situation, the client has 45 days to either provide a new SDS with an updated conclusion or provide detailed reasons to back up its initial decision. Failure to do so will result in the client becoming liable for any unpaid tax and NI fees, instead of the agency. Contractors are unlikely to appeal against any decision that a role is outside IR35.
As such, it is in the agency’s interest to monitor the decisions made by its clients. If it appears that a client may have got their decision wrong, they should be asked to reassess the outcome to ensure liability doesn’t pass to the agency. If this is not done and HMRC decides to investigate at a later date, an agency could be found liable unless they 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. However, this course of action will put the agency at risk of upsetting its client.
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. Do they fully understand the off-payroll working legislation?
Educate your clients. Blanket assessments did not go down well in the public sector and are already being challenged.
Talk to your contractors. 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!)
Make sure any IR35 solution you use includes a solid appeals process for contractors. This will help reduce liabilities for agencies and their end clients by meeting the legal requirements and take away uncertainty for contractors. IR35 Comply offers a built-in appeals process, so all the information is in one place and always accessible to all the parties involved.
Help is at hand
We’re out in the field constantly talking to recruitment businesses and supporting client visits. Our Compliance Team is very experienced in determining IR35 status using our online tool IR35 Comply.
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 service was voted the UK's Best at The Contracting Awards 2020.