The fundamentals of IR35 are NOT changing: understanding the key status indicators – personal service, control, and mutuality of obligations – is still as important as ever.
It is vital to make sure that these are properly documented in a comprehensive contract with a limited company contractor (often referred to as Personal Service Company or PSC) and the contractual terms are fully supported by the working practices.
These are the foundations of any relationship designed to reflect two independent contracting parties.
Who will bear the IR35 liability?
What is changing is the basis of IR35 decision-making and who will bear the liability. This article will establish the steps end clients, and recruitment agencies (where they form part of the supply chain), will need to go through to avoid being liable for unpaid tax and National Insurance Contributions (NICs) should HMRC investigate, and they will definitely be policing the changes.
1) As an end-client engager, is my business classified as a small company?
The draft legislation issued does not apply to small companies (as defined by s382(2) of the Companies Act 2006) which are companies for which two of the following three apply:
- Turnover of no more than £10.2 million
- Balance sheet total of no more than £5.1 million
- No more than 50 employees
If your business is a small company, you are exempt from making the decision about IR35.
However, be aware; there will be anti-avoidance legislation to stop larger companies from creating a subsidiary to engage all their contractors!
2) Is the nature of the engagement to fill a role or is it an outsourced service?
If the end client business subcontracts the performance of the services, for example, a construction company subcontracting the groundworks, the electrical or plumbing services to a third party, or perhaps a business outsourcing its IT or HR or bringing in an outside consultancy for some form of change management, then for the purposes of determining the IR35, that third party will become the end client. This is because the end-client business has subcontracted the provision of services outright to a third party.
If, as an end client, you are approaching a third party with a list of roles that you need to be filled: “Find me two plumbers, an electrician and a site manager”; your business will bear the end client responsibilities of making the IR35 status decision and you will have the liability if you don’t go about it properly.
3) What steps do I have to take to make a valid IR35 status decision?
- Determine the status based on the facts of the engagement. In order to make a determination you must gather all the facts, apply the relevant law and then make a decision. The legislation says that a PSC will be “caught” by IR35 if it is operating under a contract of employment. The legislation, however, does not state what “employment” is; for that you will need to look at case law and have a full understanding of what the tests are and how the courts interpret those tests.
- Take reasonable care in making the decision – if you are ever challenged by HMRC, that means proving that you have undertaken due diligence and that it is properly documented.
- Issue a Status Determination Statement (SDS) which explains why you have determined an engagement to be either ‘outside IR35’ (pay the PSC’s fee gross) or ‘inside IR35’ (deduct tax and NICS from the amount paid to the PSC).
- The SDS must be issued in writing to the PSC worker and the next party in the contractual chain who holds the contract with you.
- Be prepared to respond to any challenges to your decision within 45 days under the client-led disagreement process which your business must set up.
Failure to take these steps will make your business liable for the tax and NICs should your decision be challenged by HMRC.
4) What is a fee payer?
A fee payer is a concept introduced by the public sector legislation and will be highly relevant in the private sector. The fee payer is the entity which pays the PSC and if an end client engages PSCs directly, then they are both decision-maker and fee payer.
Where there are agencies in the chain, the agency directly above the PSC—which is responsible for paying the PSC—is the fee payer. This agency is liable for the tax and NICs not deducted if the decision was to pay the PSC gross (unless the end client has failed to follow the above steps; in which case they assume fee payer responsibilities).
5) What can I do to prepare?
- End clients – Determine whether the engagement is one for you to decide or part of an outsourcing arrangement.
Make sure you have robust contracts and ensure that you have determined the status of each engagement where it is your responsibility, both in preparation for April 2021 and in the future.
Consider insurance to defend against an HMRC enquiry and even the potential tax loss where you are also the fee payer.
- Agencies – Ensure that you understand enough about IR35 to know whether an engagement is caught or not.
Ensure that your contracts to both end client and PSCs are robust.
Consider insurance to defend against an HMRC enquiry and even the potential tax loss where you are the fee payer for engagements which the end client has deemed outside IR35.
6) When should I start getting ready for the private sector IR35 change?
It may be tempting to wait until next year on the basis that the changes are some time off but ensuring that you have undertaken the correct due diligence takes time, expertise, and no little effort.
We suggest that you get some independent, specialist advice and start soon before everyone has the same idea.
For further information regarding IR35, please email Paul Mason or contact Markel Tax on 0333 920 5708.
Author Paul Mason, Head of Tax Partnerships at Markel Tax
