FAQs from our IR35 webinar: Mitigating IR35 Risk
Last week, Kingsbridge’s Head of Tax, Andy Vessey, joined our IR35 Project Manager, Ryan Dawson, for an ‘Ask The Experts’ webinar to go through recent developments in IR35. This included media cases and recent HMRC wins, HS2, compliance and other topics.
The half-hour session – which you can watch here – gave a whistlestop tour of the current state of IR35, while also offering participants the chance to submit their own questions to be answered by Andy and Ryan. We had more questions than could possibly be answered in the time available, but our experts have gone through them and identified some of the most frequently asked, which they have now answered here.
Your IR35 questions answered
1 – How does IR35 impact the engagement if the candidate is not in the UK but the client is?
Good question – and one we get a lot. If you refer to HMRC’s Employment Status Manual, ESM10025, it states that an end client does not have to consider the off-payroll rules where there is no liability to UK tax and NIC. This means that a worker who is a non-UK resident for tax – and remains so for the duration of the engagement – would not be subject to PAYE and, therefore, would fall within this category. In short, IR35 does not need to be considered.
2 – We are supplying Front End Development contractors to an agile consultancy under a statement of works. Are we exposed?
For the purposes of this answer, we’re assuming that you’re the agency closest to the worker and, therefore, the ‘fee-payer’. This would mean that you, the fee-payer in the contractual chain, will be responsible for the deduction of tax and National Insurance contributions (NICs), the payment of the apprenticeship levy, and paying these to HMRC if due. This will be the case even where the client gets the decision wrong but took reasonable care in coming to its conclusion and issued the Status Determination Statement (SDS) to the worker and the party it contracts with.
You would not be exposed if the end client was classified as a small company (as per the Companies Act s382) because the responsibility of IR35 status and the tax would be held by the contractor. This is also the case where the end client is based wholly overseas.
3 – Our end client has sent through an SDS stating that the contractor is outside IR35 and it looks quite detailed and correct. If HMRC later down the line say the determination was wrong, would all the liability sit with the end client or would agencies face any potential penalties?
As is often the case, the answer to this question will largely depend on the unique circumstances. The end client must take reasonable care when determining the IR35 status of the worker. If the client fails to take reasonable care, the responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy, and paying these to HMRC will rest with the end client. That liability will always remain with the client unless it takes reasonable care in reaching its conclusion set out in the SDS. If the end client has taken reasonable care, the liability will shift down the chain and rest with the fee-payer.
4 – Can I backdate an SDS if we receive the contractor’s invoice before the SDS has been issued?
Best practice says that the SDS should be issued to the contractor on or before the date any payment is made for the services provided. If payments are made before the SDS is issued, this will result in responsibility for tax, NICs and the apprenticeship levy remaining with the person who failed to pass on the SDS. This might be the client who hasn’t issued it or with agency one who has not passed the SDS to a second agency (if applicable).Our recommendation is that, where possible, the SDS should be issued before the worker starts the engagement. This gives you plenty of time to resolve disputes of status once the contract commences.
5 – We have previously been told that if responsibility for status determination remains with the contractor, then there is no legal obligation as the agency to get this from them for our records. What would your suggestion be for this?
If it remains the contractor’s obligation to make the status determination, for example, where the end client is a small company or entirely overseas, there is no obligation for the worker to provide you with an SDS or details of their IR35 status. The worker might choose to clarify certain points around IR35 status with the agency or end client for the purposes of assessing their own status but they are under no obligation to do so.
6 – I recently undertook a status determination for a role in our business which came back as outside IR35. The candidate is looking to be paid via an umbrella company. Does this automatically place them inside IR35?
Where a contractor is operating via an umbrella company, there is no requirement to assess the IR35 status of the worker, as they are effectively an employee of the umbrella company. As a result, the rules do not apply and you do not need to consider whether or not IR35 applies.
7 – What other options do agencies have to ensure IR35 compliance when they provide the end client with one of their contractors?
Ultimately, the end client is the party in the chain who is responsible for determining the IR35 status of any worker it engages.Most agencies will try to support end clients in making decisions by providing additional administrational support, an IR35 contract review, or IR35 status tools which – in most cases – will be provided by a third party specialist such as Kingsbridge. The benefit of supporting end clients with third party experts is a detailed level of support and expertise, which is often backed up with a comprehensive insurance policy to indemnify all parties against tax liability should the determination be challenged by HMRC.
8 – Where do we find the tools and support you mentioned that Kingsbridge can provide?
Kingsbridge has a range of tools and services designed to support agencies, contractors and end clients with IR35 and status determinations. These include:
- IR35 Express Contract Review: This takes a look at the written terms of your contract and gives an opinion on whether these indicate an inside or outside IR35 status. You will also get specialist advice on how the terms can be improved, and a re-review once any changes have been made.
- Kingsbridge IR35 Status Tool: Developed by Andy Vessey, this takes a 360-degree view of your contract and working practices to give an instant, accurate IR35 determination and report. As a hybrid tool, if your result is borderline, it will be passed to an in-house specialist for a manual review.
- IR35 Protect Insurance: Kingsbridge’s unique IR35 insurance flexes to cover whoever holds the tax liability in any given engagement – whether that’s the contractor, agency or end client, giving everyone in the supply chain peace of mind.
9 – A public sector end client has provided an IR35 CEST determination, but it doesn’t give a decision on inside or outside. What should we expect for formality?
As per HMRC’s guidance at ESM10013, for the SDS to be valid the client must:
- State in the SDS whether or not the worker would be an employee or office holder, or is an office holder, for tax and NIC purposes, if they were directly engaged by the client
- Provide their reasons for coming to that conclusion
- Have taken reasonable care in coming to their conclusion
If a SDS does not satisfy the 3 criteria above, it will not be valid and the responsibility for the deduction of tax and NICs, the payment of the apprenticeship levy and paying these to HMRC, if due, will rest with the client.
While we would expect the above to be present in all status determinations, we appreciate some are not as clear as others. If you have any doubts about the content of or reasons for your SDS, I would recommend contacting your end client to seek clarity over the determination.
Need to know more?
If your question hasn’t been answered here, or if you need to know more, the Kingsbridge Knowledge Hub is packed with information for contractors and partners, keeping you up to date on all things IR35.