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The “off-payroll working” legislation means that the responsibility for determining a contractor's IR35 status is with the end client, with the person paying the PSC (the ‘fee-payer’ - usually the agency) being responsible for deducting the necessary tax, if IR35 applies. In short, under the legislation agencies need to ensure that they don’t pay PSCs gross if the contractor is ‘caught by IR35’.
The end client needs to confirm to the fee payer whether the role advertised is inside or outside IR35 and there are practical considerations that can be factored in when determining an IR35 status. They must also take reasonable care in making their IR35 status determination.
If inside IR35, the recruitment agency will not be able to pay the PSC gross but will have to deduct employed levels of tax from the payments to PSCs (or perhaps refer the contractor to an umbrella company).
Where the public authority, end client or agency believe that the role is "caught by IR35" they are likely to see a decrease in net pay by about 15%. This is because the fee payer, will have to deduct employment taxes before paying the PSC.
The obligations include:
1. Assessing whether a role is inside or outside IR35.
2. Passing on the SDS to the contractor and agency and reasons for the decision.
3. Using reasonable care in making its decision on IR35.
The legislation doesn’t say that a client will be liable if it gets a decision wrong. If the client has taken reasonable care but just got it wrong, the client will not be liable but the agency (as the fee payer) might.
In the private sector, where a client is classed as small as per the Companies Act 2006, it is exempt from the rules. In this scenario, the contractor must decide their own IR35 status. The fee-payer is also off the hook since the contractor is responsible for PAYE and NICs.
A client qualifies as small if it meets two or more of the following requirements:
1. Annual Turnover: Not more than £10.2 million
2. Balance sheet total: Not more than £5.1 million
3. Number of employees: Not more than 50
There are IR35 review services tools available such as HMRC’s Check Employment Status for Tax (CEST) tool, however the accuracy of this tool has been highly criticised. As an alternative, you can use an approved independent IR35 review service, such as IR35 Comply.
There is a new statutory client-led disagreement process. If the contractor or agency don’t agree with the SDS, they can make this representation to the client. The client then has 45 days to either inform the contractor that the SDS is correct or, to issue a new SDS. If the client fails to comply with this process, it becomes the fee-payer.
Where an end client states that the role is inside IR35 the contractor has the option of continuing to work through their own limited company using a deemed payment, working through the agency’s payroll or via an umbrella company. However many agencies and end clients are making the decision to use umbrella companies since there is less administrative and compliance burden placed upon them.
If you would like more information on what an umbrella company is and how it works, you will find more help and advice here. PayStream's umbrella company helps contractors get paid on time, every time, stay HMRC compliant and provides all the benefits of continuous employment including all the lovely perks that go with it, both big and small.
We can’t advocate strongly enough the importance of agencies, clients and contractors working collaboratively in making considered and informed decisions on IR35.
And as usual PayStream are here to help with our IR35 Review Service – IR35 Comply. Our online portal is not only quick and easy to use but all answers provided are reviewed by a team of experienced IR35 professionals. This human intervention allows us to paint a picture of the overall working circumstances of the role before determining an IR35 status. It’s this independent specialised review that satisfies the reasonable care requirement and can protect you from future claims.
If you would like more information please don't hesitate to contact our Agency Support Team
