Employment Status and IR35

What are employer’s responsibilities relating to IR35?

Since 6 April 2021, the off-payroll working rules were extended to large and medium-sized companies in the private sector. Private sector companies are considered medium or large-sized  if they meet two or more of the following conditions:

• have an annual turnover of more than £10.2million
• have a balance sheet total of more than £5.1m
• have more than 50 employees.

Under IR35,  end user clients must determine a worker’s employment status and issue a status determination statement (SDS) to the worker and their intermediary. If the end-client fails to provide the SDS or fails to take reasonable care in preparing the SDS, the end client will be the deemed employer and would need to account to HMRC for tax and NICs. A crucial step for end user clients is therefore the assessment of the worker’s deemed employment status and issuing the status determination statement.

A statutory dispute resolution process applies meaning a worker or deemed employer in the supply chain can make representations to the end client that the SDS is incorrect, which the end user client must respond to within 45 days failing which it will become the deemed employer. Consequently, if you are an end client and a contractor or deemed employer in the supply chain disagrees with your SDS and initiates the statutory dispute resolution process, you will need to ensure that you respond within 45 days of receiving such a complaint, otherwise you may become responsible for accounting to HMRC for tax and NICs. You may wish to seek professional advice at an early stage if you are changing the status of a contractor

Responsibility for actually accounting for tax and national insurance contributions to HMRC is the responsibility of the ‘fee-payer’ which is usually the end client, although it could be another entity in more complex supply chains. There is also a legal obligation on the end user client to respond to a request for information about their size from the agency or worker.

What if my business does not comply with IR35?

It is possible for HMRC to go back at least six years and evaluate past contracts to see if the legislation relating to IR35 applies, and where applicable, demand income tax, NICs, penalties and interest and so it is worth ensuring your business complies if you are the end user client or fee-payer in the labour supply chain. Where HMRC disagrees with an end user client or fee-payer’s status determination and considers that IR35 applies to an engagement of a contractor, it will recover arrears of tax and NICs from the end client or fee-payer. However, a new statutory set off mechanism was introduced on 6 April 2024 which allows end user clients and fee-payers to offset arrears of tax and NICs liabilities against taxes already paid by the intermediary, which will be a welcome development for many procurement and finance teams.