Contractors’ Questions: Do contractors need to cover themselves from the IR35 off-payroll rules?

Contractor’s Question: I thought that I knew about IR35 reform, but now I’m not so sure!

When a role is determined as outside IR35 this decision is made between the agent and the client. The contractor receives this as the SDS. Correct so far?!
The contractor has no obligation to accept the SDS or agree / disagree with the rationale behind the SDS. The contractor accepts / goes forward for the role based on the determination. Again, all correct so far?! 
Anyway, the above was my understanding under the April 6th 2021 framework.  
But this week, I’ve heard that some PSCs are being asked to ‘review the SDS’ and agree to it; and then they get given the ‘offer’ to buy IR35 insurance to cover themselves, on the thinking that the contractor shares liability with the agent and the client -- if it the IR35 determination is found to be incorrect by HMRC.  
Is this going on more than in my immediate circle? And is it correct; ethical or commercially-sound? Any guidance appreciated. I’m fear I’m next in line for such an offer!

Expert’s Answer: Where the off-payroll working legislation (at Part 2 Chapter 10 ITEPA 2003) applies, it is clear that the responsibility for determining the IR35 status of an engagement rests with the end-client only.

When agencies try to get involved with determining IR35 status

The reason why you may have the perception that the decisions are jointly made between end-client and agency is that not all businesses necessarily have IR35 expertise in-house, not least because for the first 21 years of IR35’s existence, end-clients had no need to engage with IR35.

Many agencies have seized upon this as an opportunity to enhance their services to end-clients by offering a ‘due diligence’ service (often insurance-backed). to facilitate the IR35 decision-making process.

Interestingly, HMRC’s guidance  at ESM10014 acknowledges that end-clients may need to outsource the decision-making to a third party, but the end-client must retain oversight to ensure the determinations have been carried out properly.

It may seem like a joint-decision, but the decision issued via the Status Determination Statement (SDS) is the responsibility of the client and, as ESM10014 makes clear, failure to take “reasonable care” in that decision-making will leave the end-client with the tax liability.

Challenging an SDS

The SDS must offer more than an opinion. The document must provide an explanation why the engagement is ‘inside’ or ‘outside’ IR35, and this needs to be based on both the contractual terms and the working practices. You (the contractor) have the right to challenge the SDS and the end-client must respond to that challenge in writing within 45 days.

We have no evidence of how often SDSs are challenged. Contracts, opportunities and roles tend to be advertised as being either ‘inside’ or ‘outside’ IR35, so it is unlikely that a contractor seeking an ‘outside’ engagement would put their name forward for one which was clearly ‘inside.’

IR35 insurance

The only time that a contractor has the responsibility and liability for IR35 is where the original ‘Chapter 8’ IR35 rules apply -- where their PSC is engaged by a “small company” or a company based wholly overseas with no UK presence. This would certainly be the moment to consider having a contract review to demonstrate to HMRC that you have undertaken ‘due diligence.’ You could also consider purchasing tax investigations and tax losses insurance to protect your position.

However, if your PSC is engaged by a medium-sized or large company you neither have the responsibility nor the liability under Chapter 10. It is the ‘fee-payer’ who should consider insurance, because that is where HMRC will be looking to recover the tax liability.

In a typical contractual chain, the end-client is the IR35 decision-maker and only has the liability if they have failed to take reasonable care. Assuming the end-client has taken reasonable care, then the agency has the liability because they are the fee-payer (the fee-payer being the entity which pays the contractor’s PSC).

Why a protected agency is also a protected end-client

Penultimately consider -- it is in the agency’s interest to protect themselves with an insurance policy and in the end-client’s best interest too, because in the event that the agency goes under owing HMRC the tax liability, the debt transfer provisions of the off-payroll working rules enable HMRC to go back up the chain to collect. A protected agency is also a protected end-client!

So, it really is not clear why you should be buying tax insurance when you don’t have any tax liability – in insurance jargon, you don’t have an ‘insurable interest.’ I would therefore be challenging why you are being expected to buy insurance to protect other parties. Good luck!

The expert was Tyra Ali, consultancy manager specialising in contractor solutions at Markel.

Thursday 19th Jan 2023
Profile picture for user Tyra Ali

Written by Tyra Ali

After finishing her law degree Tyra spent a number of years working for HMRC dealing with S.9a enquiries, CIS compliance, PAYE, travelling and subsistence and other compliance areas.  After several years of swiftly working through the grades she joined Markel Tax in 2006.  She brought with her a wealth of knowledge in many areas including specialist IR35 off-payroll and self-employment; CIS, Agency Legislation, National Minimum Wage and defending clients against all types HMRC challenges.

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