Off-payroll working (IR35): What agencies need to know about changes

Do you supply contractors who work through their own limited company or other intermediary? We answer some of your questions on things you want to know about off-payroll (IR35).

We’re providing opportunities through workshops, webinars, external events and on LinkedIn for agencies to hear from us and ask us questions. Below I’ll answer some of the questions we’ve recently been asked about the changes.

Does the agency need to pay Employer National Insurance contributions (NICs)?

Yes, if you are the deemed employer.

If a client decides an engagement is inside the off-payroll working rules, and so a contractor is employed for tax purposes, then you will either need to:

• Pass the Status Determination Statement onto the next agency in the chain if there is an agency between you and the contractor’s own limited company; or,
• Deduct Income Tax and Employee NICs if you are the agency that pays the contractors limited company. You will also need to pay Employer NICs, which cannot be deducted from the amounts treated as employment income of your contractor. You are the deemed employer in this situation.

In a small number of cases the agency who pays the contractor’s own limited company may not be responsible for deducting tax and NICs, guidance on this can be found here.

Can client organisations take one status decision covering all the contractors you supply them?

Clients cannot make ‘blanket determinations.’

The client organisation must take reasonable care when making a decision about whether the off-payroll working rules apply. It is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working practices.

This is different to a client organisation making a role-based determination, which is permissible in some circumstance if a client organisation applies a decision to a group of off-payroll workers with the same role, working practices and contractual terms.

This is also different to a decision by a client organisation to change the way they engage contractors. It is natural that businesses will consider whether limited companies or other intermediaries are the best way to engage contractors if they are working like employees. This is a business decision for organisations to make, and organisations are free to decide how they engage their workers.

What do I do if I disagree with the status determination statement provided?

Look at the reasons provided for the determination and talk to the client organisation if you still disagree.

If you are the deemed employer you have a statutory right to query or challenge a client organisation’s status determination in real time. Client organisations will be required by law to review their status determination and respond to any challenge within 45 calendar days. Contractors also have the right to challenge a decision.

If a challenge leads the client organisation to change their determination from ‘inside IR35’ to ‘outside IR35’, then you, if you are the deemed employer responsible for deducting Income Tax and NICs, should correct this through your payroll and reimburse the contractor. Our guidance on the disagreement process gives further detail.

What should you do if your agency doesn’t get a Status Determination Statement (SDS)?

There are three reasons you might not get a Status Determination Statement (SDS) for contractors who work through their own limited company that you provide to clients. You should talk to your client organisation to understand the reason:

• If your client is small then they do not have to operate the off-payroll working rules, and the responsibility for considering the rules stays with the contractors own limited company. If you are the agency the client contracts with then you have the right to ask the client if they are small. The contractor also has this right. In this case, you should continue to pay the contractors limited company gross.
• The client has decided an engagement is outside the off-payroll working rules (so self-employed for tax purposes). If this is the case they are not legally obliged to issue a formal SDS. However, if they do not, and their decision is wrong, then they will be liable for tax and NICs so it is likely that many will issue an “outside SDS.” In both of these cases you should continue to pay your contractors limited company gross.
• The client has decided an engagement is “inside the rules” but they, or an agency above you in the chain, has failed to pass it on. If this is the case, the party who hasn’t passed the SDS on will be liable for the tax and NICs due. You should not deduct Income Tax or NICs if you haven’t received the SDS and you will not be liable for any tax or NICs that should have been paid.

Will my agency be liable for tax and NICs if the client gets the status determination wrong?

Yes, in some circumstances.

If the client takes reasonable care when making their determination and has passed the SDS to the contractor and any agency they contract with, then they will not be responsible for tax and NICs even if they get their decision wrong. If you are the deemed employer then you would be responsible for the tax and NICs.

If the client does not take reasonable care when coming to their determination, or does not pass the SDS to the contractor and any agency they contract with, they will be responsible for tax and NICs. As an agency, if you are the deemed employer, you have the legal right to dispute the client’s determination if you think it is wrong.

If you believe the client organisation has made a mistake you need to raise this with the client organisation.

What are the rules on deducting expenses?

Expenses are allowed on the same basis as for direct employees. If you are the deemed employer responsible for deducting Income Tax and NICs then you should talk to your contractor about what expenses they wish to claim for.

The reform to the off-payroll working rules does not change existing rules on expenses – for example, where the off-payroll working rules apply, a contractor is not currently entitled to claim tax relief for ordinary commuting expenses and this will continue to be the case.

What should my agency be doing now?

You and everyone in your labour supply chain needs to make sure they are ready for the changes. You can help others to get ready by sharing HMRCs support available:

• Our help and support page lists our resources available to help you prepare, including webinars specifically for fee-payers/deemed employers.
• Share our help and support page with your client organisations, as well as our how to prepare for clients page.
• Share our help and support page, and contractor resources page which includes a flow chart, factsheet and case studies to help your contractors understand the changes. If your contractors are thinking of changing the way they work you can help them by directing them to our tax avoidance - don't get caught campaign, and reminding them they will need to consider what to do with their limited company, for example whether to close it down or not.

Keep asking us your questions. We are here to help support you and are committed to finding the best ways to help, and get you the information you need.