If a client says the assignment is outside IR35, there is no risk to the agency if it pays the contractor’s limited company gross.
Myth - if the client gets the IR35 wrong, the agency who is the fee payer may be on the hook for any owed taxes or national insurance contributions (NICs).
In April 2017, there were major changes to how IR35 was 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 limited company if IR35 applied. HMRC introduced an 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 contractor's limited company 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 the client 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 with IR35 will likely endear them to you commercially and help you solidify and build on your existing relationships.
Do they fully understand the off-payroll working legislation?
Blanket assessments did not go down well in the public sector and are already being challenged.
IR35 Comply helps agencies and clients meet legal requirements and reduces uncertainty for contractors, with a built-in appeals process and accessible information for all parties.
We’re out in the field constantly talking to recruitment businesses and supporting client visits. Our IR35 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 are well placed to discuss our umbrella company with contractors where required. Our umbrella company has been voted the UK's Best at The Contracting Awards multiple times.
