IR35 liability from April 2021: Who’s liable, for what and when?
It’s arguably the most important question facing the UK’s contractor industry -- who bears responsibility for IR35 compliance under the Off-Payroll rules in the private sector from April 2021?
However for many businesses, where services are rendered and paid for via limited companies in potentially complicated contractual chains, the who, what and when of liability under the new IR35 is a total grey area.
Here, and exclusively for ContractorUK in this two-part article, employment and tax experts at Fieldfisher, Matthew Sharp and Ranjit Dhindsa, provide an overview of where IR35 liability falls in different contractual situations.
Off-Payroll tax/rules: in a nutshell
In April 2021, the responsibility for compliance with IR35 in the private sector is shifting from off-payroll contractors to end-users.
On July 11th 2019, the UK government published draft IR35 legislation in Finance Bill 2019, which clarified plans for the rollout of the new framework to implement the shift, and other related measures.
The government stated that the new IR35 rules will impact 170,000 consultants, 60,000 end-users and generate additional tax revenue of £3.1billion between 2020 and 2024.
The long and short of it? Many contractor relationships will need to be reviewed to ensure compliance with IR35.
Who is liable for IR35?
When these Off-Payroll rules are extended to the private sector (their foundation is currently in force in the public sector and has been since April 2017), they will affect private companies using contract workers paid through Personal Services Companies (PSCs) or other intermediaries.
There is a small business exemption, which provides that a company/entity will always be classed as "small" for the first year of trading. After this, the exemption applies to companies that, during the tax year, meet two or more of the following criteria:
- Turnover not exceeding £10.2million
- Balance sheet total not exceeding £5.1million
- Number of employees not exceeding 50
If a business reaches a point where more than one of its turnover, balance sheet or number of employees exceeds these thresholds, that business will be liable for IR35 from start of the next tax year.
What is the default for IR35 compliance, and who deducts what?
In all circumstances, regardless of the number of entities in the contract chain, responsibility for making the assessment for a worker's IR35 tax status lies with the end-client (also known as the ‘end-user,’ or the ‘engager’.)
Depending on the outcome of the assessment, who is responsible for making the tax deductions varies however, depending on the length and configuration of the contract chain.
The general rule is that the entity nearest the PSC or intermediary is responsible for making deductions for PAYE under IR35.
In a standard three-entity contract chains, involving a worker, a PSC/other intermediary and an end-client, this position is clear: the end-client will be responsible for making deductions for PAYE under IR35.
In multi-party situations, where there are additional entities between the PSC/intermediary and the end-client, such as an employment agency, responsibility for calculating, deducting and paying tax on the worker's remuneration defaults to the intermediary closest to the PSC.
Example A/Who does what in a four-party chain
Let’s take a four-party situation. We have a worker, a PSC, an employment agency and an end-client. In this chain, the client will need to do two things:
(1) determine the worker's status for IR35 -- an IR35 Status Determination Statement; and
(2) inform the employment agency what that determination is.
Then in this chain, and thanks to (2) above, the agency faces requirements of its own: It must
- make deductions for PAYE
- inform the worker what IR35 determination has been made for the worker, and
- communicate the determination so that every party in the chain is aware of the worker’s status.
Modern employment arrangements can involve much longer chains, but the obligation to pass the message to every entity remains the same in all cases.
When can IR35 liability be ‘transferred’?
There is no way of shifting liability for IR35 compliance.
In a three-party chain, liability for determining and complying with IR35 will always fall to the end-client.
However, the situation can be more complicated if there are more than three entities in the contractual relationship.
Special rules apply if any of the entities in the chain are based outside the UK (such as an offshore company), or if there is a failure to comply with certain aspects of the rules by one or more of the entities.
Example B /When the end-client is made responsible
Let’s take the four-party chain in Example A, but this time, if the end client fails to inform the employment agency as to what they have determined about the worker's IR35 status to be, unless and until they pass on that information, the end-client will be responsible for operating PAYE, rather than the agency.
The same applies to longer chains, with liability resting with the entity that fails to pass on the IR35 determination message. To avoid gaps opening up, end-users can amplify their contracts to oblige other entities in the chain to assist them with compliance.
In part two, we will cover additionally important questions, such as these four:
- What other liabilities can arise from IR35?
- How can business prepare for IR35 liability?
- What changes to paperwork need to be made to reflect your new IR35 obligations?
- Do the IR35 reforms hold any advantages?