Practical considerations of IR35: a live example

This article focuses on the need to remain vigilant and consider the broader picture on when and how to determine the tax and NIC’s that may apply to Off Payroll engagements – there is much more to it than just IR35.

Thinking beyond IR35

Recently, a client (A Ltd) came to us asking us to assess the employment status of a worker (P) being provided under a new contract which will run past 5th April 2021. Being cautious to comply with the implementation of the new IR35 rules, our client thought they should seek an employment status determination on commencement of the contract to avoid any ‘surprises’ later.

On investigation, we discovered that all was not what it seemed.  Firstly, the worker was not engaging directly with our client. Instead, our client engaged a specialist advisory business (Z Ltd) to deliver services and Z Ltd was engaging with P. Secondly, P was providing their services to Z Ltd as a self-employed individual. We examine below the issues that needed to be considered in this arrangement with respect to the off-payroll working rules.

The engagements

Our client entered into an overarching contractual arrangement with Z Ltd to supply them with specialist consultancy advice, to run for two years. The contract and actual arrangements allowed Z Ltd to use their own employees, or subcontractors to deliver the services. Each service would be agreed under a separate Statement of Works (SOW). Z Ltd would be responsible for delivering the services providing certain milestones were met.

Z Ltd engaged directly with P to help them deliver the services engaged by our client. There was nothing in any of the contracts that suggested Z Ltd would supply P to our client to deliver the services, or that our client would have any control managerial, or reporting obligations over P.

Which part of the tax legislation applies?

When considering if engagements are inside or outside IR35, you must first establish which part of the tax legislation applies. The legislation should be applied in the strict following order:

1. Agency Legislation
2. *Worker’s provided to Public Sector via Intermediaries
3. Managed Service Companies (MSC) Legislation
4. Construction Industry Scheme (CIS)
5. Intermediaries Legislation (IR35)

*Extended to private sector from April 2021.

On review of the contractual and actual arrangements, we found the MSC and CIS legislation did not apply. However, as the contractual chain included an end-client (A Ltd), a potential intermediary (Z Ltd), and an individual (P), we first had to first establish if the Agency Legislation applied, or IR35.

Agency legislation

The Agency Legislation applies when:

• An individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”),
• the client is not a public authority,
• the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
• the circumstances are such that–
  • if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
  • the worker is an office-holder who holds that office under the client and the services relate to the office.

We were satisfied the Agency Legislation did not apply in this instance as both the contractual and actual working arrangements concluded that P was not required to, or under an obligation to perform the services personally to our client.  Z Ltd could use their own employees or another subcontractor to deliver the services if they so wished.

Intermediaries legislation – IR35

The arrangements with P are not caught under IR35 as P is not providing their services via their own intermediary. 

However, records at Companies House suggested Z Ltd met the definition of an intermediary for IR35 purposes, so the arrangement between our client and Z Ltd was reviewed for IR35 purposes. The Intermediaries Legislation confirms that IR35 applies when:

• An individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”),
• the client is not a public authority,
• the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
• the circumstances are such that–
  • (i)if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client, or
  • (ii)the worker is an office-holder who holds that office under the client and the services relate to the office.

The overarching contractual arrangements between our client and Z Ltd did not in this case require a worker to perform their services personally for the client (A Ltd), therefore the conditions for IR35 to apply are not met.

Conclusion

By applying the legislation in the strict order and applying the contractual and actual terms of the contract the conditions set out in the legislation, we concluded the engagement between our client and Z Ltd was a fully contracted-out service. It therefore falls on to Z Ltd to consider the employment status for its engagement with P as they assume end-client responsibilities, which we were not engaged to advice on.

The end-client and others involved in the labour supply chain should, however, always be mindful of HMRC’s ability to recover unpaid PAYE/NIC from them should those originally responsible for meeting this liability be unable to do so.

How we can help

By examining the arrangements between the above parties in detail we were able to establish that in reality, the arrangement between our client and Z Ltd was a supply of services; not labour. Therefore none of the 5 sections of legislation mentioned above, dealing with the provision of workers, applied in this case.

Had we followed our client’s initial request for assistance they would have engaged in an employment status exercise they were not required to undertake.  By taking a holistic approach to the suite of ‘IR35’ legislation, our team of employment tax specialists help clients navigate through this complex part of the tax legislation.

When arrangements are caught by IR35 we have developed our own technology tool which will provide an assessment of the worker’s employment status. This also demonstrates reasonable care has been taken in performing the employment status determination – a key requirement under the new legislation.  

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