Our business uses subcontractors. Do the IR35 tax changes affect us?

17th March 2021

On 6th April 2021 the rule changes regarding IR35 (twice delayed) will come into effect.

If your business works with subcontractors you may need to be aware of and manage the risks to your business.

What are the current IR35 rules?

IR35 (or the Off-payroll rules) are a regime that the government (and HMRC) have developed to obtain income tax and national insurance contributions in situations where a worker has provided their services to a business and the fee for the services provided has been paid to a Personal Services Company (“PSC”) in which the worker is a controlling shareholder, usually the only employee. The use of a PSC company has allowed the employee/shareholder to minimise tax and national insurance paid by taking dividends as opposed to a salary.

Seeking to close this potential loophole, the original legislation shifted the liability to ensure tax and national insurance is paid away from the PSC if the clients receiving the services were in the public sector.

What do the new IR35 tax changes mean?

The new rule changes now make it an obligation on large and medium companies in the private sector as well as public sector companies as End Clients to establish the status of the PSC and pass the relevant declaration statement to the company. The rule change places the responsibility to make the necessary deductions for the income tax and national insurance on the “End Client” (the entity using the services of the worker).

What happens if there is an agency involved?

If there is a “chain” e.g. an agency has a contract with the PSC and then arranges for the worker to provide services to the end client, the Agency also has new responsibilities.

This is probably best explained in an example: The End Client pays a fee to the agency and, after the agent’s deduction of their own commission/fee this is then paid onto the PSC. In this example, the Agency is the “Fee Payer” directly above the PSC and is now responsible for the deduction and collection of the necessary tax and national insurance contributions before paying the PSC the fee.  

The only situation where the End Client would retain Fee Payer status (and therefore responsible for the deduction of taxes etc) would be if:-

  • as End User the client did not make a status determination statement; or
  • as End User the client makes a status determination statement but did not take reasonable care in doing so; and
  • the End User makes a statement but does not pass it onto the individual worker and if applicable the intermediaries such as the agency/ other links in the chain; or
  • the parties between the End User and the PSC is not a qualifying person.

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