Who is responsible for IR35 compliance?

Public sector and private sector organisations are responsible for determining an individual’s employment status under off-payroll working rules.

This has been the case for the public sector since 2018. Many private sector employers became responsible for determining the employment status of their contractors in April 2021.

In this article especially for employers and client organisations, we’ll cover:

What an employment status determination statement is
What you need to include in it
Why contractors don’t want to be inside IR35
The effect the new rules have had on how public sector and private sector hirers’ behaviour has changed
How we provide support to our clients so that they can keep their contractors outside IR35

For more information on IR35 compliance for employers, please call +44 (0) 203 051 9792, email [email protected] or fill out the form below.

Creating a status determination statement

The revised off-payroll working rules apply to contractors providing services to your organisation through their own limited company (sometimes called a personal service company).

As you are the beneficiary of their services, you are the “end client”. If your organisation is also responsible for paying the invoices issued by an individual worker’s personal service company, you are also the “fee payer”.

There may be multiple parties in a labour supply chain. For example, if you hire through an employment agency and they pay your contractor, they would be the “fee payer” in the chain.

For each contractor, you, the end client, need to produce an employment status determination statement.

Each status determination statement is your assessment of a contractor’s working practices and written contracts under IR35 rules. You must send a copy of the determination statement to the contractor and all other parties in the labour supply chain.

Please note that contractors can be self–employed sole traders too. However, most operate through their own limited companies for tax purposes.

What areas do you need to cover in a determination statement to comply?

The purpose of the IR35 compliance test is to determine whether or not contractors are, in HMRC’s eyes, genuinely independent providers of services or disguised employees.

This is a complex area of tax legislation with a substantial history of case law behind it. Getting a worker’s employment status right is not easy if you don’t have training and experience in determining IR35 status, no matter how much due diligence you personally undertake when writing them.

This is by no means exhaustive but, to be outside IR35 (the desired state for nearly all contractors and organisations), the nature of your relationship with a contractor should look something like this:

They can send someone else in to do the work specified in the contract without fear of penalty from you. In other words, they don’t have to provide services personally.
They use their own equipment when carrying out work for you.
They pay for mistakes made at their own cost rather than relying on your organisation to pay for them. This means that there is a financial risk to them in fulfilling the contract.
They can work when and where they want and you have no control over that.
They don’t receive standard in-employment benefits like sick pay and holiday pay.
They don’t take orders from or give orders to anyone else in the company.
They take out insurance like professional indemnity insurance and public liability insurance.

Why do contractors not want to work inside IR35?

Employers and contractors don’t pay the same tax.

If a contractor is inside IR35, you must deduct income tax and employee National Insurance contributions from them. In addition, you must pay Employer NICs at 15.05% of your contractor’s gross wage plus the Apprenticeship Levy (if applicable).

You don’t have tax and National Insurance or other employment taxes to deduct with off-payroll staff outside IR35.

When a contractor is outside IR35, both they and your organisation end up paying tax at much lower levels.

Effect on public sector and private sector use of contractors

Changing the party responsible for IR35 compliance has had a big effect on contractors and the services provided to organisations.

If a public sector body or a private business misclassifies its contractors’ IR35 statuses, they have to pay back all relevant tax for each affected contractor that would have been collected at the end of the tax year (the so-called deemed payment).

The size of any fine added on top of the tax depends on whether the mistake was made through carelessness or dishonesty.

This has led to many employers declaring all working arrangements within IR35 to protect themselves financially, a situation which many contractors resent.

How our specialist service can ensure compliance with IR35

You’d prefer not to have to pay tax and National Insurance on your contractors’ rates. Your contractors would also prefer it if you weren’t deducting tax from them.

While your competitors are placing themselves in a corner issuing blanket or role-based determination statements, stand out from the rest by providing the working conditions the very best contractors want. Contact us today.