IR35 Understanding the risk

The April 2021 off-payroll working private sector changes have ripped up the rulebook when it comes to who determines IR35 status and who faces the tax liability. The changes have created two entities for HMRC to target: end clients and fee payers.

End client
Your responsibility is to review the IR35 position, make a determination and pass that determination to the correct parties. Don’t follow the correct process and you could face a large tax bill.

You could be challenged if you don’t:

  • Take reasonable care when making an IR35 status decision on each engagement
  • Create a Status Determination Statement (SDS) which explains your decision
  • Pass on the SDS to the relevant parties
  • Respond to any challenges to the SDS within strict time limits

Fail to undertake any of these four requirements and HMRC can make you the fee payer, even if the tax and NICs have been correctly deducted by the actual fee payer below you in the chain.

If you contract directly with the PSC, you always have the fee payer liability.

If HMRC come calling, are you confident that you could argue your case and importantly have the evidence to show the processes that have been followed? If you are the fee payer, do you have the means to pay the additional tax, interest and even a penalty?

Fee payers
Your responsibility is to ensure the personal service company (PSC) is subject to the correct Tax and NICs treatment. Typically this responsibility sits with the recruitment agency, but the end client will be the fee payer where they contract directly with the PSC.

Agencies
If your recruitment agency is the fee payer, you could face a large tax liability if PSCs have been paid gross, but HMRC can successfully argue that they should have been paid net of tax. It won’t matter that the decision was taken by the end client. If the end client did everything required by the legislation, but just came to the wrong decision, your agency is the fee payer.

It’s therefore your tax bill to pay.

You need to be suitably protected from the fee payer liability. Whether you have ten or thousands of candidates on engagements deemed ‘outside IR35’, each one of them carries a tax risk to your business that could be as much as 25% of the gross day rate you have paid them.

You’ll also have to pay interest and if you can’t demonstrate you took reasonable care to check that the payments were being correctly made, a penalty could also be charged.

The risk only grows over time.

So how do I protect my business?
Whether you are an end client or an agency, if you are reading this, you should be well on the way to tackling your off-payroll working compliance. You can do this by making sure your contracts are fit for purpose and that you have a robust means of proving that these tie in with the working practices of the engagements your contractors are working on.

But what if HMRC decide that they want to challenge your processes and the decisions that you have made about engagements? How will that affect your tax position as a fee payer?

You’ve made the effort to create that strong compliance foundation; it deserves to be defended from an HMRC challenge. When you are the fee payer, you want to know that your business isn’t going to be ruined by a huge tax bill.

Insurance which defends and protects the entire contractual chain
Markel Tax provides a combined tax investigations and tax losses insurance policy to protect fee payers, which:

  • Pays up to £100k in fees towards the cost of defending an HMRC enquiry. All the way to Tribunal if necessary
  • Extends to defending a challenge to the end client’s decision-making process
  • Provides an experienced IR35 investigations specialist to defend your case
  • If HMRC successfully argue IR35 applies; the policy pays the tax, interest and penalties for which you as fee payer would be liable
  • The policy meets your fee payer liability ensuring that your business is protected and your clients don’t have to worry about the transfer of debt provision

You are protected and so is the entire contractual chain.
The policy works on an aggregate limit for each end client you work with, ensuring that each of your end clients knows that your liability for their contractors is protected. You select a limit of indemnity which suits the requirements of both end client and fee payer with premiums typically ranging from 6% to 10% of the limit of indemnity selected.

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