Whose liability is it anyway?

In order to understand where the off-payroll working (IR35) liabilities sit in any contractual chain, it is important to understand how the Chapter 10 ITEPA 2003 legislation views each party.

The decision-maker

The decision-maker is the entity receiving the personal service of the contractor. HMRC guides us at ESM8035:

It is therefore necessary to establish the nature of the services being provided by the worker and the identity of the person for whom those services are being provided and then apply the test at section 49(1)(c) Chapter 8 ITEPA 2003.

The decision-maker has to decide whether IR35 applies to each engagement they have with their limited company (Personal Service Company, PSC) contractors. This involves reviewing contractual documentation and the working arrangements between the parties.

Once a decision has been made, this has to be communicated to the contractor and any third parties via a Status Determination Statement (SDS). Until this document has been passed to the contractor and any agency below the client in the contractual chain, the client will hold the IR35 liabilities. 

The decision-maker must ensure that they set up a disagreement process to handle any SDS disputes. At the very least, the client is obliged to consider any dispute, respond within 45 calendar days and inform the worker (and any third parties) of their final decision. A new SDS must be issued if the determination is changed. 

Small companies are only responsible for ensuring that they comply with IR35 as soon as they stop meeting the qualifying criteria for a small company (please see ESM10006 for HMRC’s guidance). 

The fee payer

The fee payer is the entity which pays the limited company. In many cases, this will be a recruitment agency – though in a direct engagement, the client is the decision-maker and the fee payer. 

If there is more than one agency in the chain, the agency directly above the PSC will be the fee payer.

The fee payer is responsible for ensuring that they apply the decision to the worker’s income. If the SDS prescribes that the engagement is ‘inside’ IR35, then the fee payer is responsible for making the correct deductions, which include Apprenticeship levy if appropriate, Employer’s NICs and PAYE. 

Other agencies

Agencies in the chain, which are not the fee payer, are still responsible for ensuring they pass the SDS down the chain. If an agency fails to relay the SDS, the liabilities will rest with them.  

The worker 

The purpose of the 2021 amendment to the legislation is to increase compliance by reducing ‘self-policing’. It is therefore not surprising that the PSC is the party with the least amount of legal obligations or liability imposed by Chapter 10. Only where the worker has deliberately provided or withheld information designed to result in an incorrect ‘outside’ determination, would the worker be open to liability.

If an SDS has not been issued, the worker has the right to question why. 

The worker also has the right to ask the client to confirm their size for the purposes of complying with the legislation (if the client is a small company, the engagement will be subject to Chapter 8 rules and the PSC will be responsible for IR35).   

HMRC’s expectation 

HMRC expect that every party in the chain takes reasonable care and provides guidance at ESM10014, but acknowledges that what taking reasonable care looks like will vary from client to client. Nevertheless, proactively engaging with the legislation is a good start.  Everyone in the contractual chain needs to be aware of their position and the responsibilities that come with it – as, until a party has disposed of their obligations, the tax liabilities will rest with them.

Whether you determine the working practices by use of a digital assessment platform by seeking independent professional advice, or outsourcing the decision-making process, it must be remembered that as the end client, one cannot pass your obligations onto other parties. The decision-maker is always responsible for the validity of the decision and the SDS.

Provided the decision-maker (and any other agencies in the chain) has passed down the SDS, it will be the fee payer that will be responsible for any tax liabilities. Though of course, as mentioned previously, the party which fails to meet its obligations will be the one responsible for paying the bill.

Where the SDS baton has not been passed on or reasonable care has not been taken, HMRC can impose higher penalties. If the loss of tax stems from a failure to take reasonable care, this could be up to 30% of the tax liability.