IR35 and the Off-Payroll legislation both exist to ensure that HMRC recoups what it believes to be the appropriate tax yield from instances of ‘deemed employment’. The Off-Payroll legislation hasn’t introduced any changes to the way that employment status is determined.
The key difference is that the Off-Payroll legislation has effectively shifted compliance requirements and certain liabilities further up the supply chain for affected engagements. It also introduces an additional tax burden. Whereas under IR35 employer’s NICs are funded out of the contract rate by the contractor, the Off-Payroll legislation requires that this sum be paid on top of the contract rate by the ‘fee-payer’.
Understanding of the Off-Payroll legislation amongst hiring firms and agencies is essential. All public and private sector contracts are subject to the Off-Payroll legislation, with one exception.
Small company exemption
Private sector contracts where the hiring firm qualifies as a ‘small company’ are the only arrangements where the original IR35, the Intermediaries Legislation, still applies.
The small company exemption was a concession made by HMRC in response to heavy criticism concerning the administrative burden that the Off-Payroll legislation would place on business, with the smallest firms deemed to be at greater risk. This exemption only applies to small end-clients and not small agencies, a controversial move given the fact that more than half of the estimated 20,000 UKs recruitment agencies are small.
Adopting the definition set out in the Companies Act 2006, the small company exemption excuses qualifying companies from their compliance requirements, and applies to companies that meet two of the following criteria:
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Annualised turnover of up to £10.2m
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Balance sheet assets of up to £5.1m
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Average number of employees of up to 50
Most notable changes under the Off-Payroll legislation
| Intermediaries Legislation (‘IR35’) | Off-Payroll | |
|---|---|---|
| Assessing IR35 status | The contractor is responsible. | Responsibility rests with the hiring firm. |
| Tax collection | The contractor is required to apply the correct tax treatment at each financial year end. | The ‘fee-payer’ assumes responsibility for calculating, reporting and processing tax on payments made to contractors deemed inside IR35 via PAYE. |
| Employment tax liability (Inside IR35) | The contractor’s limited company must fund employer’s NICs. | The fee-payer is responsible for paying employer’s NICs and the Apprenticeship Levy (0.5%) on top of payments made to the contractor. |
| Tax liability risk | Where HMRC contests status liability lands with the contractor. | If HMRC contests, the fee-payer is liable, unless the client hasn’t taken ‘reasonable care’ in assessing the status. |
| Compliance lifecycle | IR35 status considered after the contract has been either partially or completely fulfilled. | Status must be assessed at the beginning and monitored throughout to ensure no deviation. |
The Off-Payroll legislation compliance requirements heavily involve a party described in the legislation as the ‘fee-payer’. They are defined as the party in the supply chain that directly engages with the contractor’s limited company. In most engagements, this will be a recruitment agency. If there is no agency or intermediary other than the contractor’s limited company present, the hirer becomes the fee-payer.
Tax liability under Off-Payroll
Controversially, even though the hiring firm is responsible for assessing the IR35 status of an engagement, HMRC has decided to hold fee-payers liable for any unpaid tax, penalties and interest in the event that a status assessment is found to be incorrect. This seems like an unfair burden for the agency to take on, but there are two scenarios where the liability will be switched:
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If the contractor used fraudulent documentation to prove their outside status – in which case, the contractor’s company is liable.
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If it is proven that the hiring organisation didn’t take ‘reasonable care’ in determining the contractor’s status – here the hirer becomes liable.
Fortunately, these provisions offer agencies some protection against any unwarranted tax liabilities, particularly now that hiring firms are required to demonstrate reasonable care through the provision of a Status Determination Statement (SDS) upon the completion of each assessment.