Agencies that provide contractors can lawfully change the off-payroll status of end clients. This is according to an employment status specialist, Matt Boddington who works as the director at Chartergates.

According to Mr. Boddington, the Income Tax (Earnings and Pensions) Act sections 61M to 61T implies that the party responsible for payment of income tax — the contracting agency — is not obligated to act according to the conclusion of the client regarding employment status. He says that the provision of section 61M(1) clearly shows that the fee-payer has the only legal authority as per the IR35 tax rules to make deductions from payment to the worker.

An assessment of a client is not sufficient to determine whether the IR35 applies to a worker. The assessment is only treated as advisory and the party making the payment has the sole authority to cut taxes.

Boddington says that the contracting agency is not under any obligation to even know what is the assessment regarding the client. The legislation only mandates the client to deliver the assessment to a party making the tax payment. Unless the fee-payer is engaged by the client, there is no need to know about the outcome of the assessment.

Faux Pas Regarding Obligation for IR35 Tax Deduction

Since the introduction of the IR35 legislation, many have been confused regarding who has the authority over determining the tax status of contractors.

The IR35 legislation doesn’t make any statement that the fee-payer does not have to know or accept the conclusion of the client. HM Revenue and Customs (HMRC) has encouraged fee-payers or contractors to make tax deductions according to the assessment of the end client.

HMRC’s IR35 private sector consultation even proposes imposing a fine if the fee-payer does not deduct taxes as per the assessment of the end-client. This suggests that HMRC while being aware of the grey area in the tax rules has not acted according to the legislation in introducing IR35 in the public sector.

Contracting agencies are urged to comply with practices that Boddington considers a cunning drafting of IR35 legislation that plays into the hands of the taxation authority.

The biggest mistake with the IR35 off-payroll legislation is the assumption that the contracting agency is liable of an incorrect assessment of taxes. But this is contrary to the existing Income Tax (Earnings and Pensions) Act. This cunning bit of drafting by HMRC has resulted in blanket assessments that have resulted in a lot of contractors wrongly deemed to be within the scope rules.