As of the April 6th, IR35 decision-making has moved almost universally away from the limited or personal service company (PSC) to end clients and the liability to the fee payer which is often a recruitment agency. According to HMRC, some 60,000 medium and large-sized engagers and 20,000 recruitment agencies are affected by the off payroll working changes. We will now consider the responsibilities and liabilities of the legislation and how the market has reacted.
As of the April 6th, IR35 decision-making has moved almost universally away from the limited or personal service company (PSC) to end clients and the liability to the fee payer which is often a recruitment agency.
According to HMRC, some 60,000 medium and large-sized engagers and 20,000 recruitment agencies are affected by the off payroll working changes. We will now consider the responsibilities and liabilities of the legislation and how the market has reacted.
End clients have fallen into two camps: those embracing the changes because they recognise the need to retain the best resources; and those – primarily in banking & financial services – side-stepping the issue by not engaging PSCs. It will be interesting to see over time whether positions change because clients realise they don’t have access to the best freelancer talent.
Sourcing or outsourcing
Not all end clients are necessarily the end client for IR35 purposes.
If a client is seeking to fill a role, then it is decision-maker and must make a decision, issue a Status Determination Statement and set up a client-led disagreement process. If it fails to do so, HMRC will confer fee payer liability upon the end client – please see ESM10014 ESM10014 - Employment Status Manual - HMRC internal manual - GOV.UK (www.gov.uk) for more detail.
Where end clients genuinely outsource a project or service provision to a 3rd party, that 3rd party becomes the end client and takes on the end client decision-making responsibilities for the PSCs it then engages.
But where an end client is asking the 3rd party to fill specific roles, then the original end client retains the decision-making responsibilities and the 3rd party assumes the role of fee payer, as it will be paying the PSC.
It is important to know which scenario exists and HMRC has issued guidance on outsourcing at ESM10010 ESM10010 - Employment Status Manual - HMRC internal manual - GOV.UK (www.gov.uk)
Small companies – a further complication
1.5 million small companies (defined here) are exempt from the legislation and the decision-making and liability fall to the PSC. A by-product of a small company being the outsourcer is the original end client loses its IR35 decision-making responsibility, as well as any potential liability.
Don’t be surprised if HMRC focus compliance effort on contractual chains containing small company consultancies to ensure that their existence is not to avoid end client obligations. Having robust contracts throughout the supply chain and ensuring that the working practices match them will be key. See IR35: What do businesses need to do to protect themselves? for more information.
Agencies sat immediately above the PSC in the contractual chain are the fee payer and liable for any uncollected taxes if the end client has made errors despite taking reasonable care. They need to understand their client’s approach to IR35. Some have been working with clients to provide an insurance-backed solution where the due diligence on contracts and working practices has been undertaken, thereby offering protection to the fee payer agency and removing end client concerns about transfer of debt. To find out more see IR35: What do recruitment agencies need to do to protect themselves?
The future of contracting
Many contractors have seen a worsening of their tax position with many forced to take employed roles by end clients who have ended all PSC engagements. Nevertheless, the UK economy depends upon a flexible labour market, and so contractors and freelancers will remain a cornerstone of that labour force even if at lower numbers in the short term.
In summary, the legislation represents a massive and unquestionably difficult change which will bring unwanted cost and administration to end clients and agencies, as well as a greater tax burden for many contractors.
If you have clients yet to react to these changes there is help, guidance and protection available for all parties in the contractual chain. Markel Tax can provide certainty of IR35 status and the security of insurance protection from the costs of tax liabilities and HMRC enquiries. To find out more visit www.markeltax.co.uk/IR35 or speak to one of our team on 0333 920 1589.