Fee Payers in Terms of IR35, HMRC and Contractors
The Government has decided that fee payers will now decide a freelancer’s IR35 status rather than the contractor
So what are fee payers?
This is a term coined by the Government and HMRC to describe those who are responsible for hiring and paying contractors.
In the public sector this would be the Government department or trust.
In the private sector, this would be the company, or more specifically, the department who hires and pays their contractors.
Public Sector IR35 Rules
It is assuming greater importance with the public sector IR35 rules brought in by the Government in April 2017 and the rollout to the private sector in April 2020.
Previously contractors decided their own IR35 status.
Now companies, and specifically the fee payers, will decide the IR35 Status of Contractors.
History of IR35
IR35 was brought in during 1999 by the Government to stop the practice of companies laying off staff on a Friday and re-hiring them on the Monday as contractors.
They would sit at the same seat and do exactly the same job as before.
There were tax benefits in doing this for both the company and the new contractor.
There was an outcry in The Times newspaper about it.
So, the Government decided that they should do something about it.
So, they brought in the IR35 laws to stop this practice.
Contractors as Disguised Employees Under Fee Payers
They saw these contractors as disguised employees.
However, IR35 also caught in its net many genuine contractors who had been operating as proper contractors for years.
The Professional Contractors Group (now IPSE) was set up to fight this.
However, Governments of both hues saw the extra tax money that this was bringing in and regarded it as a potential goldmine.
Conservative Party Promises on IR35
In 2010 the Conservatives gave winks and nods to the PCG (IPSE) that they would abolish IR35.
So much so that the PCG rushed out a press release prior to the election saying that the Conservatives had promised to ‘look at’ IR35 again.
So, there was no hard promise there.
When they got elected they did ‘look at’ IR35 again – and they decided they wanted to keep it.
Indeed Chancellor Osborne said he wanted to STRENGTHEN it.
So, he hired 30 extra HMRC workers at 3 different locations specifically for IR35.
This was at a time when they were making staff cuts elsewhere in HMRC.
So, they obviously saw this as a potential goldmine.
So, these new Government IR35 rules are just the latest in their attacks on the freelancing profession.
Fee Payers to Decide Contractors Tax Status
Under these new Government rules contractors would no longer determine their own IR35 status.
The fee payer would decide their IR35 status.
And if they got it wrong there would be penalties on the Government department who made the mistake.
It is now the responsibility of the fee payer to get it right.
Disincentive to Declare Contractors Outside IR35
As you can see there is a heavy disincentive to hire or declare contractors outside the scope of IR35 for tax purposes.
The recruitment agency involved would be responsible for deducting tax and national insurance before paying the contractor.
To help the fee payer to decide a contractors IR35 tax status, HMRC came out with a new online IR35 test called the Check Employment Status for Tax (CEST).
However, this has no legal bearing and it is heavily weighted in favour of HMRC. It is widely ridiculed.
CEST the Definitive Test for IR35 status – HMRC
Despite this, Government department fee payers used this as the definitive test of a contractor’s IR35 status.
In 750,000 tests since it came out 54% of contractors were found to be outside IR35 and 46% either inside IR35 or indeterminable.
It is now likely that the Government are going to implement this in the private sector from April 2019. They are likely to announce it in November’s budget.
Fee Payers in Private Sector
Fee payers in the private sector would be those companies who hire contractors / freelancers.
More specifically it would be the department hiring them.
Those fee payers have a responsibility to their companies not to incur any financial penalties.
So, they are likely to err on the side of caution.
They too are likely to use HMRC’s CEST as the sole arbiter of a contractor’s IR35 status for tax purposes.
As stated above here will be heavy financial penalties on hiring companies if they get it wrong.
Well, if they get it wrong in favour of the contractors anyway.
However, if hey make the contractors sit the CEST test, and he contractor is found to be outside IR35, there will be no penalties on the hiring company if it is later shown fhat fhe contractor is inside IR35 – or the rules and test change.
So, there is a very heavy incentive to make contractors sit the test.
As happened in the public sector, many freelancers who have been operating as contractors for many years will now find themselves classed as ‘disguised employees’ or ‘off payroll workers’ by the test and the fee payers.
Contractors Closed Limited Companies and Joined Umbrella Companies
What actually happened in the public sector is that those contractors who failed the CEST test closed their limited companies and joined umbrella companies.
That was still marginally preferable to just paying the IR35 tax.
Some locum doctors and IT Contractors found that they were losing up to 30% of their income by doing this.
So this is likely to happen in the private sector too in April 2020..
The fee payers will force contractors to take the CEST test online.
Incidentally, the departments have to inform HMRC of the results.
Companies Must Inform HMRC of IR35 Test Results
HMRC will store these test results for future reference.
Also, freelancers who have been operating through limited companies for years but who the test now finds to be disguised employees may find themselves under investigation by HMRC for back taxes, penalties and interest payments.
It’s an easy source of money for both HMRC and the Government.
This could be coming to a company or department near you soon.
For lots more news and advice articles on IR35 click on IR35 Tax.
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Hi, I am confused by the use of the term fee payer in this article as the party who decides the IR35 status of the ‘worker’ According to the HMRC website https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules the fee payer is the party responsible for making the correct tax deductions at source. The party responsible for determining the IR35 status is the client who then passes this information onto the party they have a direct relationship with in the supply chain. Ordinarily this would be the recruitment agency. The HMRC guidance note refers to clients, agency or other organisation the client contracts with, fee payer, intermediary and worker. I do not think it is particularly clear but my understanding which is probably wrong is worker (contractor), intermediary (contractors PSC/Limited Co or possibly Umbrella), Fee Payer (recruitment agency), agency or other org client contracts with (recruitment agency or AN Other), Client (the Bank or Private Sector body)