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With the off-payroll legislation being extended from the public sector to the private sector from April 2021 it has created new and additional responsibilities for businesses that they previously didn’t have.
Businesses that had no previous involvement in IR35 are now a key part of the process, whilst contractors are pretty much absolved of what that had to previously do.
The main change from the intermediaries legislation to the off-payroll legislation sees a shift in the responsibility for who determines IR35 status. Previously this was done by the contractor supplying their services through their Personal Service Company (PSC), irrespective of who the client was.
The new legislation means that the client is now responsible for determining the IR35 status of a contractor supplying their services through their PSC – where the client is a public sector organisation or if in the private sector where the client is a medium or large businesses (according to HMRC guidance). Where the contractor is supplying their services through their PSC and the client is a small business in the private sector then the responsibility for determining IR35 status remains with the PSC.
Who is responsible for the tax liability has also changed. Previously, if a contractor was found to have been working inside IR35 when they claimed to be outside IR35 and were being taxed accordingly, the tax liability lay with the contractor and their PSC. Under the new legislation it sits with the fee-payer, which is the entity in the supply chain closest to the PSC.
Together this creates problems that need to be overcome so that all parties can remain compliant with the legislation, and which is where a tool like the Contractor Compliance Portal comes in to play to assist.
For a business to qualify as small, the business must satisfy two of the following criteria from HMRC:
– A turnover of less than £10.2 million
– The balance sheet total is less than £5.1 million
– The business has fewer than 50 employees.
The client is ultimately the organisation in the IR35 supply chain that receives the contractors services – often via the contractors PSC. The responsibility for determining IR35 status moves from the PSC/contractor to the client – unless the client is in the public sector, or they are in the private sector and classed as a small business under HMRC guidelines.
The client must use reasonable care to assess the engagement and issue their IR35 status determination i.e. inside or outside IR35, via a Status Determination Statement (SDS).
Additionally, where the client is not responsible for payment to the PSC, usually when there is a recruitment agency and/or other entities in the supply chain, the SDS must be distributed to each party so that they are aware of the IR35 status. Any party not passing on the SDS automatically becomes the fee-payer and is therefore required to make the necessary tax deductions and pass and report these to HMRC.
Clients should take steps so that they understand and have the ability to assess their off-payroll workforce and issue SDS’s as required – using reasonable care at all times. Using CEST is definitely not recommend, but we of course highly recommend using a third-party system that is free, full of functionality and feature rich, such as the Contractor Compliance Portal.
The most common requirement placed on a recruitment agency in an IR35 supply chain under the off-payroll legislation is that of being the fee-payer.
Many recruitment agencies will assist clients and work together on determining IR35 status, but ultimately that remains the responsibility of the client. To do this recruitment agencies will seek to use specialist IR35 knowledge, either human resource or an online system, sometimes even a mix of the two.
However, many recruitment agencies do not have the required internal expertise, access to external expertise, and/or money available to use systems that assist them in meeting their fee-payer requirements. Therefore, finding the right partner is paramount for everyone in the supply chain, and is why using a system such as the Contractor Compliance Portal ensures that compliance requirements are met.
The fee-payer is the entity that is closest to the PSC in the supply chain and is responsible for paying the contractor. The fee-payer is also responsible for deducting the relevant tax and NI contributions (and items like the Apprenticeship Levy, if applicable) and paying these across to HMRC.
In the vast majority of instances the fee-payer is the recruitment agency, but if the engagement is say direct between the PSC and the client, then the client will be the fee-payer.
Where the SDS has not been passed on through the IR35 supply chain, any organisation holding onto the SDS automatically becomes fee-payer and responsible for the potential tax liability.
