The Who’s Who of IR35: Where Responsibility Lies After April 2020

IR35

The government has now released further detail about the reform of IR35 in the Private Sector, which means we know a little more about where responsibility will lie after April. In this article, we’ll explain who the various parties are and what their responsibilities will be.

A Contractor's Guide to Demonstrating You're Outside IR35: Click here to download>>

What’s happening in April?

IR35 is legislation concerned with whether you are “employed for tax purposes” based on your relationship with your end client. For the moment, unless your client is a public-sector body, you are responsible for assessing your own IR35 status, and you are liable for any unpaid tax and NICs if you get it wrong.

From April 2020, medium and large private-sector clients will be responsible for determining the IR35 status of any contractors they engage, and liability will lie with them. This means it will no longer be up to you to determine whether you’re inside IR35, or “employed for tax purposes”, unless your client is a small private-sector business.

Small private-sector clients

You will still be responsible for determining your own IR35 status if your client is not a public-sector body and meets two of these three criteria:

  • Turnover of £10.2 million or less
  • Balance sheet total of £5.1 million or less
  • 50 or fewer employees

It is not clear how contractors will know if their client is classed as a small company, other than the absence of an IR35 determination. Our best advice is to check with your client if you think this exemption might apply.

Medium, large and public-sector clients

If your end client is either a medium or large private-sector business or a public-sector body, they will be responsible for assessing your IR35 status.

The client must keep detailed records of all determinations, including the reasons for the decision and any fees paid.

The determination and the reasons for it must be passed to you, and any person or organisation they contract with (the agency, for example), on or before the contract start date. The client must exercise reasonable care in reaching the determination.

If the client is also the fee payer (the party who pays your limited company), they will have the fee payer’s responsibilities too (see below).

Failure to meet any of these responsibilities will result in the client being responsible for any unpaid tax and NI.

The effects of the client’s IR35 determination

If the client determines that you’re outside IR35, it’s business as usual from that point (assuming you’re outside at the moment). The fee will be paid to your limited company without deductions, and you will account for your own tax and NI according to your salary/dividend strategy.

Where the client determines that you’re inside IR35, the other parties in the supply chain will have additional responsibilities, as detailed below.

The intermediary (your limited company)

Where the legislation refers to “the intermediary” it means the entity responsible for paying you as “the worker”, which in most cases will be your limited company. Your first responsibility will be to decide if you accept the determination or not. If you don’t, you’ll need to follow the client’s dispute process, and you can expect a response within 45 days.  

If the determination puts you inside IR35, tax and NI will be deducted from the fee before it’s paid to your limited company. Your company can claim “recognition” for the tax and NI already deducted and should run salary through payroll with no deductions.

The agency

If an agency pays your limited company, they will be the fee payer and will have the fee payer’s responsibilities (see below). If they’re not the fee payer, they must pass the determination to the next party in the supply chain. Failure to do so will result in the agency becoming responsible for the tax and NI.

If HMRC are unable to collect outstanding tax and NI, liability may pass back to the first agency in the supply chain, so agencies need to carefully consider who they engage with.

The fee payer’s responsibilities

The fee payer is the whichever party pays your limited company, and could be the client or an agency. They should receive the determination from the from the client, or the agency immediately above them in the supply chain. They can dispute the determination if they believe it’s incorrect, using the client’s dispute process.

If the determination puts you inside IR35, before making payment to your limited company, the fee payer must:

  • Calculate a “deemed direct payment”
  • Deduct tax and employee NI from the payment
  • Pay employer’s NI

On making the payment, they must report to HMRC using RTI.

What if the client does not provide an IR35 determination?

If the client doesn’t provide an IR35 determination by the start date of the contract, they will be responsible for the tax and NI until they have fulfilled their obligations. In the absence of a determination, the fee payer will make payments to your limited company without making deductions, but they are expected to ask the client, or the agency above them in the supply chain, why they have not received the determination.

What if you disagree with the client’s IR35 determination?

The client must have a dispute process, which will allow you to present your reasons for disagreeing with the determination, along with any evidence to support them. The client must then consider the new information and decide if they will amend their determination or not. They must respond within 45 days.

While waiting for a response from the client, all parties should proceed according to the original determination.

If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

 

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