If the client deliberately misleads an agency on IR35 status the client bears the tax risk - Fact or Myth?
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 2021.
Where are we now?
The new legislation was originally meant to come into effect in April 2020. This has been delayed due to COVID-19, so the changes are now effective from April 2021 onwards. The finalised legislation is similar to the draft legislation seen last year, with some additional points. For example, it now includes a requirement for the end client to respond to any appeals against the contractor’s IR35 status determination, provided these are made before the final payment is received.
Information exchange is key
Although the agency as the ‘fee payer’ will usually be liable for paying the correct levels of NI and tax, it is the client who 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.
Contractors can challenge IR35 decisions
If the contractor disagrees with the client’s assessment, they will be able to submit an appeal to the client. The client is required by the new legislation to respond to an appeal within 45 days, and provide either a new Status Determination Statement (SDS) with an updated conclusion or the reasons for standing by its original conclusion. If the client does not do so, this will result in the client becoming liable for any unpaid tax instead of the agency. This provision should act as a safeguard against clients trying to pass the buck by attempting to mislead the agency or failing to put a good IR35 determination process in place.
Liability may pass up the chain
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 2021. 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.
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 2021. 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 is award winning.