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End users will have to decide the IR35 status of the engagement, but the recruitment agency is responsible for making correct tax deductions.
Recruitment agencies who may not have payroll in-house will have to deduct tax and NICs from all contractors who fall inside IR35, AND find the funds to pay employers NICs and the apprenticeship levy on these contractors pay.
Failure to do so could mean HUGE consequences. If correct deductions aren’t made, HMRC will seek recovery from the agency and potentially, EXTRA PENALTIES can be added.
As an example, a contractor with an income of £100,000, would have a tax and NICs bill of c.£20,000.
If the contractor was found to have an incorrect IR35 determination, the end client could face a bill of £80,000 plus interest, penalties and fines.
HMRC are able to extend an enquiry back as far as four years.
Potential end client bill per contractor = (20% of total salary + interest + fines) x4
Our new solution designed for contractors with their own Limited Company / Personal Services Company (PSC) who want to continue to benefit from the opportunity to work on contracts of their choice, regardless if they fall under Supervision, Direction or Control (SDC) following expected changes in IR35 legislation from April 2021.
Upgrading to our PSC Flex solution is free of charge and provides contractors with the flexibility to continue to process payments through their Limited company when they are deemed ‘Outside IR35’ and for those contracts where they are deemed ‘Inside IR35’, we will process PAYE payroll via our Umbrella service.
With end of year accounts and self-assessments included, our PSC Flex service gives your contractors total flexibility and 100% compliance at all times.
IR35 applies to a supply chain where the worker provides their services through an intermediary, usually a PSC. The current wording of the 2020 Finance Act includes umbrella companies within their definition of “intermediary” however it has been confirmed that this will be changed prior to the legislation taking effect.
Where the CIS contractor uses their own PSC, yes. However Sole Traders are not affected because IR35 only applies to incorporated companies.
Statement of Work contracts set out the project/work to be completed, as opposed to a requirement for a contractors time. These types of contracts do fall outside of the scope of the IR35 rules, however HMRC is aware of this and will actively challenge any contracts of this style which are used purely in an attempt to “get around” IR35.
Any umbrella companies which you have already vetted for compliance and appear on your PSL can continue to operate as normal. We suspect there will be a spike in “rogue” umbrella companies to meet the demand from PSC contractors. It is always better to use an umbrella like JMK Group UK which has been trading for many years and has the Professional Passport compliance accreditation.
The new IR35 rules apply to the first payment made after 6th April 2020. So, whilst hypothetically a PSC can continue to trade in this way and receive payment up to the 6th April, you must consider whether they are trading correctly in the meantime. By this I mean, if they are “inside IR35” from the 6th April, why are they trading “outside IR35” until this date if not for a tax advantage. If you are unsure, it is best for them to use an umbrella for this assignment.
If you are aware of a PSC contractor being “inside IR35” from 6th April and you continue to allow them to operate “outside IR35” until that time you could be at risk of facilitating tax evasion. It is recommended that you keep thorough records of all your contractors and communications concerning their status in case you are investigated. If you have followed the rules correctly, these records will demonstrate this.
There are several IR35 insurance products on the market, however you should take advice on your circumstances before choosing which one to use. Some of these products may not be effective, and in the worst cases, could create a tax liability that did not exist before. Speak to your insurance broker for more information.
The IR35 rules were designed by HMRC to tackle “disguised emplyment”, a practice whereby a contractor provides their services through a Personal Service Company (PSC) in order to benefit from the tax advantages of being self employed, even if this does not accurately reflect their working practices.
The current rules require contractors using a PSC to look at the way they work and decide whether they fall outside IR35 (self employed for tax purposes) or inside IR35 (should be taxed as an employee). The PSC then must pay tax appropriately according to its IR35 status decision.
From the 6th April 2021, your client will be responsible for deciding the IR35 status of every engagement with a PSC contractor. This change of responsibility was rolled out for assignments in the public sector in 2017 but will be extended to the private sector from this date.
Your client must take reasonable care in reaching their decision and give reasons for their conclusions. They must communicate their decision in the form of a Status Determination Statement (SDS) to your agency and the contractor. In practice the end user will probably try to issue the SDS before you start the assignment.
The new rules apply to all contractors who supply their services via a PSC.
The majority of your clients will have to apply the new rules, however small businesses meeting two or more of the following criteria are exempt:
From the date the new legislation takes effect, liability for deducting appropriate tax and NICs from the contractors fee sits with the “fee-payer”.
The fee-payer is the entity which pays the PSC company, which is usually the recruitment agency.
Failure to deduct correct tax and NICs based on whether the contractor is inside or outside IR35 could have significant repercussions for your agency, such as:
A practical solution is for your agency to ensure that all PSC contractors who are or are likely to be assessed as “inside” IR35 are paid through an umbrella company who will deduct tax and NICs at source through PAYE.
In the past, the decision to see if IR35 legislation applied to your current work and contract, was your personal decision to make.
From April 2021, this is no longer the case. It will not be your personal decision anymore.
It will now be the decision of the company you work at each day, referred to as the “end client”. The “end client” is not your recruitment agency.
If your “end client” decides you are “outside IR35” (you remain self-employed for tax purposes), nothing will change for you.
If your “end client” decides that you are “inside IR35” (you are an employee for tax purposes), you will have your income taxed at source, the same as being paid PAYE by an employer.
If this is the case, it may not be cost-effective for you to use your own limited company for this particular piece of work and contract.
Many “end clients” will use the HMRC approved CEST (Check Employment Status for Tax) tool, to make their decision.
The tool asks a number of questions, at the end of which a decision on IR35 is given. CEST can be found online here:
Some “end clients” have already begun communicating their decisions (“status”), while others will still be assessing their existing contractors/temporary workers.
It is the “end client’s” responsibility to communicate their decision to you, you are not expected to ask for it.
You will be able to appeal a decision on your “status”.
However, if an “end client” has taken reasonable care in making their original decision, they do not have to change their mind on appeal.
Many contractors/temporary workers will stop owning a limited company and move to being employed by an umbrella company, a preferred alternative by many recruitment agencies.
Speak to one of our specialist advisors as soon as possible, who will help you move from owning a limited company to being employed by an umbrella company.