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Whilst many businesses are by now familiar with the introduction of the off-payroll working legislation to IR35, having been introduced into the public sector in 2017 and into the private sector in 2021, just as many aren’t. So sit back and let us explain.
So what’s really changed, anything? Well, there have been a couple of significant changes to how the legislation is applied in practice – which is a key point to make as it should be reinforced that ‘IR35’ itself has not changed, just the application of it, who is responsible and who is liable has.
Under the old way of working the contractor and their Personal Service Company (PSC) that they provided their services through assessed IR35 status, paid themselves accordingly, and were exposed and responsible for any tax liabilities should HMRC come knocking, open an investigation and find them to be inside rather than outside IR35 – via the Chapter 8 ‘Intermediaries Legislation’.
The introduction of the Chapter 10 ‘Off-Payroll’ legislation brings about a new way of applying IR35. The key status tests and case precedence have not changed, nor have the penalties per se, but what has changed is who does what i.e. assess IR35 status, how, and who is liable should an outside IR35 status determination be quashed and deemed inside IR35.
Assessing the status of an engagement is now the responsibility of the client – which is the entity in the supply chain that ultimately receives the services of the worker (the contractor via their PSC).
However, it is only the responsibility of the client where the client is a public sector organisation, or where they are a private sector organisation, and they are either a medium or large business (according to HMRC definitions).
If the client is a small business (according to HMRC definitions) then the responsibility to assess IR35 status remains with the contractor and their PSC – just like the old days. Numerous industry commentators believe that in time, likely around 2025-26, this exemption will be removed and everything will come into line so that there is one consistent approach to assessing IR35 status.
So, back to being either a medium or large business, what happens in reality is that clients and recruitment agencies work together to undertake two assessments of IR35 status. Firstly, to advertise the role an IR35 status assessment needs to be undertaken, with reasonable care, so that there is evidence to support and show how that decision was made. There is then a second IR35 status assessment undertake when a PSC is placed into a role to create an engagement, and which produces what is known as the SDS – ensuring all compliance requirements are met and all parties agree.
The new way of working does not apply where the client is in the private sector and is classed as a small business (according to HMRC definitions), meaning that contractors engaged to them will still need to assess their own IR35 status.
To assist, HMRC for once provided quite clear guidance on what a small business is defined as. To be a small business the organisation must satisfy two or more of the following requirements, as per the Companies Act 2006:
1. Have an aggregate turnover less than £10.2million.
2. Have an aggregate balance sheet total less than £6.1million.
3. Have less than 50 employees.
The key document that needs to be produced is called the Status Determination Statement (SDS). The SDS is the responsibility of the client and shows if an engagement is inside or outside IR35 and the reasons for that.
The SDS must be passed to all entities in the IR35 supply chain. A key feature when assessing IR35 status is that the client must have undertaken reasonable care when coming to their decision, placing a responsibility on the client to do things properly – which can be via CEST (not recommended), internal or external human expertise, or via a third-party system, such as the Contractor Compliance Portal.
If the SDS is not passed to the next party in the chain then the client becomes the fee-payer and takes on the responsibilities and exposures that come with being such. If another party does not pass on the SDS then they become the fee-payer. It’s for this reason that our Fee-Payer IR35 Insurance protects all entities in the IR35 supply chain.
Where the SDS is disputed i.e. the IR35 status is deemed incorrect by the contractor, they can raise a dispute. The response has to come from the client (within 45 days of the dispute being raised) and should contain the decision and reasoning. In reality and given the client oversees the dispute process, almost no SDS’s get overturned – with many calling the process unfit for purpose and in need of a rethink. A major failing point of CEST is that as no reasoning is given for an IR35 determination, it means any disputes emanating from a CEST IR35 determination become messy as there is no supporting rationale or information.
The final piece of the jigsaw in the new way of working is the fee-payer. The fee-payer is the entity in the supply chain that is next to the PSC, and in the vast majority of IR35 supply chains the fee-payer is the recruitment agency. In a direct model, where the PSC contracts directly with the client, the client would be the fee-payer.
The fee-payer is required, for inside IR35 engagements, to deduct at source and pass on as required; PAYE, National Insurance (NI) contributions, and anything else such as Apprenticeship Levies (where applicable), and before paying the PSC.
With contractors and their PSC no longer having the exposure to the tax liability risk if HMRC open an IR35 status investigation, the risk exposure has shifted to the fee-payers. Businesses classed as the fee-payer are starting to face combined exposures running into the millions in respect of outside IR35 engagements.
Insuring away the risk brings peace of mind that should the worst happen they’re covered for the costs and tax liabilities, and have professional representation on their side to defend the matter against HMRC – something that often takes a long time, costs a lot, causes a lot of stress, and distracts from the core activities a business undertakes.
As part of the Contractor Compliance Portal, any (but only one) entity in the IR35 supply chain for an engagement is able to take out insurance that provides cover for all of them for £100,000 per claim for the fees of a professional to battle and defend against HMRC and £100,000 per claim for the tax and interest due, as well as any penalties applied by HMRC at the conclusion of their investigation.
Businesses using the Contractor Compliance Portal can automatically insure all outside IR35 status determinations, or pick and choose which ones they wish to insure, on a month by month basis – with no annual or minimum period required. Reporting and insurance documentation issue is automatic, as well as the collection of the premium due – allowing businesses to sit back and relax knowing it’s all in hand and on cover.
