Who is responsible for determining IR35 status?

In April 2021, new rules came into force governing who was responsible for determining whether or not a contractor’s working practices fall within IR35 legislation.

The same rules apply now to the medium- and large-sized private sector businesses and charities as have applied to the public sector since 2017.

To speak to IR35 determination specialists, please call CoComply on +44 (0) 203 051 9792, email [email protected] or fill out the form below.

Which contractors could IR35 apply to?

Many companies use external contractors to perform specialist tasks for which they have a temporary need but which their current staff are unable to carry out.

IR35 applies to companies that engage with independent contractors through an intermediary like a personal service company (normally a contractor’s own limited company). IR35 also applies to self-employed contractors introduced via a recruitment agency.

Typical of these arrangements is that:

The worker/contractor is not on PAYE and they have not signed an employment contract.
There is an agreed schedule of work for the contractor to carry out for a pre-determined price which may be based upon hourly rates, milestones achieved, and so on.

Knowing the difference between a client and a fee-payer

Under IR35 off-payroll working rules, the end client is the organisation in receipt of the contractor’s service. The fee payer is the company which pays for their labour through, for example, a worker’s personal service company.

As an example, take a database specialist contractor supplying their expertise through a limited company to an IT firm on a specific project.

In this case, the IT firm is both the fee payer and the client.

In their role as a client, they are responsible for determining the employment status of the contractor under off-payroll rules.

In their role as the fee payer, they must deduct income tax, Employee National Insurance Contributions and, if applicable, the Apprenticeship Levy if the contactor’s engagement is caught by the IR35 rules (aka the Off-Payroll Legislation)

When a worker’s employment status is within IR35, their invoice must be settled after the correct taxes have been deducted. They must transfer payment of withheld monies to HMRC by the 22nd of the following month and submit information on payments made and monies withheld under the Real Time Information system.

When an employment agency is involved in the labour supply chain

Where there are more parties involved than just contractors and end clients, it’s sometimes more difficult to differentiate between a client and a fee payer in a contractual chain.

Let’s say that our contractor providing a specialist service to their IT firm was introduced via a recruitment agency. The IT firm again decides that the arrangement is within IR35.

The IT firm, as the client, pays the employment agency’s invoice for the contractor. The employment agency is the fee payer as they pay the contractor. Therefore, deducting tax and National Insurance is the agency’s responsibility for the services personally provided by the contractor.

Seconded contractors

Some professional services firms (consultancies) deploy independent consultants on longer-term assignments to clients, for example, part-time financial directors and fractional CMOs.

Particular care needs to be paid to each consultant’s employment status in these situations.

Is a consultant supplying services to your firm (the professional services firm), or, in reality, the end client? Does their work enable you to bill the client? Or are they supplying the end client with their expertise, insights, and know-how? Between your company and your client, how much control do you exercise over your independent consultants’ day-to-day activities and what is the billing arrangement like?

These tests define who is the ‘end client’ in the supply chain and therefore who has responsibility for IR35 compliance. If you receive services from a professional service firm that subcontracts those services to PSC Consultants, then do not assume that you are not responsible for IR35 compliance. Often, if the professional services firm sub-contracts the work to a Consultant, and that Consultant works broadly for you as the end client (i.e. the consultancy is broadly speaking not further involved in the delivery of those services aside from acting as another intermediary), HMRC considers you to be the end client engaging the Consultant for IR35 purposes.

At Colnort we believe this presents a sizeable risk for many organisations, as they will miss these in their supply chain checks.

How to ensure compliance

In all cases, you must let the contractor know whether their engagement with your company falls within the IR35 rules.

Where a supply chain is involved, it’s best practice to carry out due diligence to be certain of every organisation involved. Send out your IR35 status determination statement to the closest party in the supply chain.

Keep records that you informed all parties. This will be particularly important if you need to defend your company in the event of tax evasion occurring at another part of the chain.