Broadly speaking, IR35 applies where a contractor provides services to an end user via a personal services company or other intermediary (PSC) but, if the contractor was engaged directly, they would be an employee for tax purposes. Currently, the contractor is supposed to operate PAYE and deduct NICs if IR35 applies.

For any payments made on or after 6 April 2020 that is set to change as a result of the IR35 reforms.  Instead, the end user  will be responsible for assessing if IR35 applies and operating PAYE and NICs (including paying employer NICs and the apprenticeship levy) where it does. 

If the end user engages with an agency, and the agency provides a contractor operating through a PSC, then the position is different. In these situations, the end user  is still responsible for assessing if IR35 applies (and issuing a Status Determination Statement) but the agency (as the entity paying the PSC or “fee payer”) will have the obligation to operate PAYE/NICs.

Draft regulations transferring liability from fee payers to end users

When HMRC published the draft legislation  to bring into force the IR35 changes, it reserved the right to legislate for the circumstances in which liability could be passed up a labour chain from a fee payer to an end user.   Most of the respondents to the technical consultation that followed the draft legislation made it clear that the government needed to be clear about the circumstances in which that would happen.  The Government has now drafted regulations that give HMRC wide ranging powers to pass liability up the labour chain.

Provided the agency is in the UK, HMRC will (in the first instance) seek to recover PAYE and NICs from the agency, as the fee payer.  However, if the PAYE and NICs are unpaid and HMRC considers that “there is no realistic prospect of recovery within a reasonable period” it can seek to recover those sums from the end user. 

This would apply even if the end user company has issued a Status Determination Statement making it clear that the contractor is within IR35 and paid the agency a fee which anticipates that the agency will pass on the PAYE/NICs element of that fee to HMRC.  In that case, the end user could be obliged to meet the PAYE/NICs costs twice. 

The technical guide accompanying the draft Regulations makes it clear that HMRC will not exercise the power to pursue end users in the case of a genuine business failure by the fee payer, but the parameters of that are unclear.

The draft Regulations also provide that, if the fee payer has exhausted HMRC’s appeal process, the end user will have no further right of appeal; it is stuck with the appeal already made even if it would have taken a different position.

What does this mean in practice

Many businesses are intending to use a fee payer intermediary in order to avoid the complexities of having to build a payroll/finance system that enables PAYE/NICs deductions to be made for contactors whilst at the same time processing a contractor invoice subject to VAT.

These draft Regulations mean that this is not the perfect solution.  Where an end user is using a fee payer intermediary it needs to select that intermediary very carefully,  ensure that its business is sufficiently robust and that the necessary governance processes are in place to ensure that PAYE/NICs are properly paid in accordance with the end user’s Status Determination Statement. 

End users should also ensure that any commercial terms with the fee payer intermediary include clear IR35 indemnities (although, in practice, it may be difficult to recover under those if HMRC has already failed to recover tax).

For more guidance on the IR35 reforms, download our Inbrief (updated to reflect the draft Regulations).