New IR35 Private Sector Legislation explained

The new draft IR35 legislation

The long awaited “private sector IR35” legislation has finally been released in draft form. Here's Markel Tax's quick guide to what it means for contractors.

Rather than creating new legislation, the draft proposals extend the existing public sector legislation into the private sector (albeit with some modifications).  The draft proposals can be found here.

The main principles of the public sector legislation, which will now apply to the private sector, have not changed.  In simple terms, two key parties are created:

The End Client decision-maker receives the services of the Personal Service Company (PSC) worker, and the end client’s obligation is to make a decision as to whether or not an engagement falls within IR35 (i.e. the individual is a deemed employee).

The “Fee Payer” is the party responsible for ensuring the correct tax treatment is applied to the PSC.  Gross payment of the PSC is outside of IR35, or NET (subject to PAYE) if the engagement falls within IR35.  The Fee Payer is typically the party closest to the PSC in the contractual chain (i.e. the party physically paying the PSC).

Who does it apply to?

The new proposals will apply to private sector and third sector engagements where the end client is a medium or large business as defined by the Companies Act (2006).  Small companies are exempt and these are defined by the provisions of section 382(3) of Companies Act 2006:

The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements:

  • Turnover of no more than £10.2 million
  • Balance sheet total of no more than £5.1 million
  • No more than 50 employees

Where the end client falls within this definition, it will not need to consider the new legislation and, as of now, it falls to the PSC to consider whether the arrangement is within IR35 and make the decision.

Where the end client business does not fall within the small companies’ definition, the new rules will apply.  It is noted that the legislation provides counter-measures to ensure subsidiaries and associated companies cannot take advantage of the small companies’ definition to extricate them from the legislation.

While the principles of the legislation have not changed from that of the public sector legislation, the amendments have introduced addition burdens for the end client business (and other parties in the chain).

Status Determination Statement (SDS)

As decision-maker, the end client must provide produce an SDS.  This is a written determination which provides a conclusion as to whether IR35 applies to the engagement and must provide the reasoning.  There are also provisions which oblige the end-client to take reasonable care in providing this SDS.

We therefore consider that “blanket decisions” or assessment on groups of roles may not satisfy this “reasonable care” criterion.  However, whether HMRC will seek to address such decisions when the answer is “caught by IR35” is highly debatable.

Once the Decision-Maker has produced the SDS, it must give this to the PSC worker, and to the party directly below it in the contractual chain.  Effectively, this places the burden on the end client to inform the bottom most and top most parties in the chain below it of its decision.

If the end -client fails to deliver the SDS then it assumes the liability of “Fee Payer”.  Once it has passed the SDS on to the party below it in the chain, it then disposes of this potential liability as “Fee Payer”.  Nevertheless, the SDS becomes somewhat of a hot potato when there are multiple parties in the contractual chain.  What the legislation says is that the last party, above the PSC, in the chain to receive the SDS is the party who will be deemed “Fee Payer” for purposes of the legislation.

For example, if we take the following contractual chain:

Client      →      Agency 1              →          Agency 2              →          Agency 3          →           PSC  

If Agency 2 receives the SDS and does not pass it down to Agency 3, then it is Agency 2 which is deemed as “Fee Payer” with the potential liabilities associated.  It’s like a game of pass the parcel, whoever is left holding the SDS when HMRC come knocking wins the prize of potential Tax and NI liability!
We can foresee a number issues with this “passing of the SDS” in more complex contractual chains, and the potential for multiples disputes between parties; as until it is “passed on”, the party holding the SDS retains the potential liability as Fee Payer for payments made to the PSC.  All parties in the chain will need to act swiftly to ensure they dispose of their “Fee Payer” status before a relevant payment is made to the PSC.

Client-led disagreement process

The end-client must implement its own “disagreement” process to allow the PSC to raise any objections to the SDS.
The legislation does not provide prescriptive steps on what this process should look like, but it does impose a 45-day time limit for the end client to respond to the PSC’s disagreement with the SDS.  The end client must then either confirm its existing decision along with its reasoning, or issue a new SDS along with its updated reasoning.  If a new SDS is produced, then it must be delivered to the relevant parties as above.
If the client fails to provide its reasoned response within the 45 days, it holds the position of Fee Payer for the purposes of the legislation.  While the legislation does provide that the end client will not be held liable if false information has been provided, it does not contemplate any delays, or other circumstances.  It is simply “you are a Fee Payer if you do not respond within 45 days”.
We can foresee a huge burden on end client organisations in the early days of the implementation.  For those who prepare in advance of the legislation coming into effect and do not engage in discussions with PSCs, they could see themselves inundated with “disagreements” on day one of the new legislation (and will likely struggle to cope with response). 

Transfer of debt?

Aside from the party left holding the SDS and having the potential liability as Fee Payer, the legislation also grants provision, via amendments, to the PAYE regulations to seek recovery of any unpaid tax and NI from any “relevant person”.  A relevant person is simply any party to the arrangements in which the relevant payment to the PSC is made.
Within HMRC’s published response to the consultation, they would appear to have in contemplation holding the highest agency in the chain accountable for any non-compliance lower in the chain (and where it cannot recover from that agency, then the end client).
“The government believes transferring tax and NICs liabilities where there has been non-compliance in the labour supply chain and where it is not possible to secure the tax liability from the noncompliant entity to the first agency and then to the client, will incentivise all parties in the labour supply chain to take steps to apply the rules as intended. The government hopes this will support the majority of organisations who comply with the rules”


The majority of the concerns raised in the initial round of consultation in the Spring have been largely ignored.  It would also seem the government intends this to be “self-policing” legislation.  There still remains uncertainty as to how HMRC will tackle IR35 enquiries.
If the end client SDS is completed with reasonable care, but HMRC disagree, will a Fee Payer further down the chains be held accountable for unpaid tax and NI?   Where will HMRC commence an Enquiry?  Into the end client business? Or, on the party charged with ensuring the correct tax treatment (i.e. the Fee Payer)?  These and a large number of similar practicalities involved in an IR35 enquiry simply do not appear to have been fully considered.
The government has committed to providing further advice and support in the summer of 2019 and we hope these considerations will be addressed.  The government has accepted the concerns that HMRC’s CEST tool is woefully inadequate in providing an accurate decision, and has committed to investing time in improving this.
What still remains the ominous elephant in the room is what the government plans to do with self-employed status.  The consultation on self-employed status closed on 1 June 2018 and nothing has been published since.  The over-riding consequence of this consultation is if the government do move forward with changing the legal definition of self-employed status, this will replace the current legal basis for deciding whether IR35 applies.
End client businesses will need to invest heavily in specialist advice in respect of IR35 to form the basis of its SDS as well as sufficient resources to administer a disagreement process.  Blanket decisions and short cuts are unlikely to provide a sufficient defence.
End client organisations sitting on the periphery of the small companies’ definition need to take great care to examine the legislation to determine whether they fall within the definition of a small company.  An incorrect decision could result in them unwittingly falling foul of any non-compliance.

We would encourage all PSCs to seek a review of their current engagements.  If contracts and working practices currently demonstrate the engagement is outside of IR35, that position should not change after the legislation comes into effect next year.  Moreover, an independent review will provide the PSC with a ready prepared submission to present to the end client in the event that the end client decides is the engagement falls within IR35.
The government has asked for comments on the draft legislation by September 5 2019 and Markel Tax will be providing commentary and concerns from theirclients.  Markel Tax have already been working with a number of end client, agencies and PSCs, so are well-placed to help with any concerns. Please contact Markel Tax's specialist team on 0345 0660 035.