With the changes to the IR35 regime in the private sector due to come into force in April 2020, one of the recurring questions is: If a contractor is deemed “in-scope” for IR35 purposes, who is responsible for making the required deductions for income tax and National Insurance contributions? In this article we consider who has this responsibility, and in particular when this will fall to the end-client.
To consider this further, we have set out two of the most common scenarios by way of example below.
Party A engages the services of a contractor. The contractor provides his/ her services through a personal service company (PSC). Party A makes payment for the contractor’s services to the PSC, and the contractor receives payment from the PSC (usually by way of dividends).
Party A contracts with a recruitment agency for the services of a contractor. The recruitment agency contracts with the PSC for the contractor’s services. Party A makes payment to the agency, and after deducting its own fee, the agency passes the fee on to the PSC. The contractor takes its payment from the PSC in the same way as in example 1.
Of course, the chain can be more complex than shown in these examples.
Status determination – end-client’s responsibility
In both cases, it is Party A’s responsibility (as the end-client) to make a determination as to the employment status of the contractor, and to record this decision within a status determination statement.
The status determination statement must then be passed to the contractor, and any third party involved in the chain (in example 2, the agency).
Responsibility for making any required deductions for income tax and NICs falls to the “fee-payer.”
The fee-payer is the entity directly above the PSC in the chain. In example 1, this will be the end-client and in example 2 the agency (although see the exceptions to this below).
When does the end-client retain fee-payer status?
Although in example 2 the fee-payer will be the agency, the end-client will retain fee-payer status and will be responsible for making the required deductions for income tax and NICs on payments made to the PSC in the following circumstances:
- the end-client is the party directly above the PSC in the chain (i.e., as in example 1);
- the end-client is not the party directly above the PSC (i.e. as in example 2), but:
- the end-client does not make a status determination statement;
- the end-client makes a statement but does not take reasonable care in doing so;
- the end-client makes a statement but does not pass this on to the individual worker (and if applicable, the agency); or
- the party between the end-client and the PSC (usually an agency) is not a “qualifying person.”
Debt recovery provisions
On the face of it therefore, provided the end-client makes a status determination statement, takes reasonable care in doing so, and passes it to the appropriate parties, the risk to the client for liability in respect of any income tax and NICs due as a result of the consultant being deemed in-scope for IR35 purposes is relatively low.
This however, is unfortunately complicated by the debt transfer provision contained within the proposed IR35 changes, whereby HMRC can recover unpaid PAYE from anyone in the supply chain. A client can therefore do everything it is required to do in terms of the status determination statement, and still be held liable! Unhelpfully, to date there is no guidance on how these provisions may be applied by HMRC.