Late IR35 status determination

[kempc23]

I started working on an outside IR35 contract last October. There are a few entities in the supply chain: Me > MyCo > Cons1 > Cons2 > Endco.

Right at the start, I went through the process of ensuring the contract with Cons1 was compliant. It was agreed with Cons1 that MyCo was providing a contracted out service to Cons1, and Cons1 was providing a contracted out service to Cons 2. It was also agreed that as Cons1 is consider a “small business”, then the responsibility for determining status was with MyCo.

I determined the contract to be outside IR35. I then had the contract reviewed by QDOS, who suggested a number of changes, which were agreed and made. Finally, I took out IR35 insurance and signed the contract.

Today I received an email from Cons2 with a Status Determination Statement and a CEST form, stating that I would be regarding as an employee if I was directly engaged by Cons2. They also state that the SDS covers the period from October 2021 to date, and that an SDS was not previously issued as Cons2 were previously informed that I was an employee of Cons1, and therefore IR35 regulations would not have applied. Note, I have been extended twice during this time.

At the moment I am not sure what they are going to do about it, but I assume they are going to terminate the contract, and either ask me to sign a new one, which would be inside IR35, which may (or may not) be at a different rate. What I think has happened is that Cons2 thinks that they have messed up somewhere along the line, and now they are trying to cover their tracks by issuing an SDS now. I am almost certain that Cons2 is not telling the truth about having been told by Cons1 that I was an employee of theirs, as why would they have done that? Note that I have been extended twice since October, and currently have a contract with Cons1 till December.

Can anyone give me some practical advice as to what I should be doing in this situation? I mean it will totally depend on what Cons2 want to do. But is their SDS valid? As to me it looks like they have not exercised reasonable care in putting it together. I know I can also appeal it, as I do not agree with a number of points in the CEST form, as well as not agreeing that Cons2 are responsible for performing the SDS in the first place. But it does not feel like it is even worth appealing it.

[eek]

Oh Dear

I started working on an outside IR35 contract last October. There are a few entities in the supply chain: Me > MyCo > Cons1 > Cons2 > Endco.

Right at the start, I went through the process of ensuring the contract with Cons1 was compliant. It was agreed with Cons1 that MyCo was providing a contracted out service to Cons1, and Cons1 was providing a contracted out service to Cons 2. It was also agreed that as Cons1 is consider a “small business”, then the responsibility for determining status was with MyCo.

Did a specialist firm do the above because it is wrong.. it's the size of the end client that determines what set of rules a contract falls under.

I determined the contract to be outside IR35. I then had the contract reviewed by QDOS, who suggested a number of changes, which were agreed and made. Finally, I took out IR35 insurance and signed the contract.

Shame QDOS didn't do a sanity check at the first point as to who the end client because they may have picked up the issue above at the correct time

Today I received an email from Cons2 with a Status Determination Statement and a CEST form, stating that I would be regarding as an employee if I was directly engaged by Cons2. They also state that the SDS covers the period from October 2021 to date, and that an SDS was not previously issued as Cons2 were previously informed that I was an employee of Cons1, and therefore IR35 regulations would not have applied. Note, I have been extended twice during this time.

At the moment I am not sure what they are going to do about it, but I assume they are going to terminate the contract, and either ask me to sign a new one, which would be inside IR35, which may (or may not) be at a different rate. What I think has happened is that Cons2 thinks that they have messed up somewhere along the line, and now they are trying to cover their tracks by issuing an SDS now. I am almost certain that Cons2 is not telling the truth about having been told by Cons1 that I was an employee of theirs, as why would they have done that? Note that I have been extended twice since October, and currently have a contract with Cons1 till December.

Can anyone give me some practical advice as to what I should be doing in this situation? I mean it will totally depend on what Cons2 want to do. But is their SDS valid? As to me it looks like they have not exercised reasonable care in putting it together. I know I can also appeal it, as I do not agree with a number of points in the CEST form, as well as not agreeing that Cons2 are responsible for performing the SDS in the first place. But it does not feel like it is even worth appealing it.

Well the determination is late and I don't think the excuse that they thought you were Con1's employee is valid is going to wash with HMRC.

And the determination isn't Con2's to provide because it's the responsibility of the end client unless Con2 are the people fully responsible for the project (a step that is almost impossible to achieve so it will sit with the end client)

However, someone has a very large mess and a very large tax bill to pay (given that they've said it's been an issue since October - stupid them) so step 1 go through your contract with a fine toothcomb and check there isn't a clawback clause. It would look something like

T
4. If it is determined by the Client, that the Assignment falls within scope of IR35 any payment due to the Company pursuant
to clause 4.1 shall be payable directly by the Employment Business or by the third party nominated by the Employment
Business subject to the third party or Employment Business deducting all applicable taxes (including any national insurance
contributions) required by law or any other fees charged by the third party or Employment Business. For the avoidance of
doubt, if requested, the Company shall be required to enter into a separate contract with the third party in relation to payment,
deduction of applicable taxes and other fees. The Employment Business shall not be liable for any losses whatsoever and
howsoever arising from IR35.

from IR35 clause in contract - Contractor UK Bulletin Board

Probably also worth reading Consultancy MSA and IR35 Red Flags - Contractor UK Bulletin Board and let's wait and see what jamesbrown can add.

[kempc23]

Thanks eek

There is a clause related to taxes, which reads similarly to the clawback clause you mentioned-

If we or any of our related bodies corporate are or become liable for the payment of any taxes, we may deduct the amount of our liability or prospective liability for the taxes of any amount due by us to you, whether under this agreement or otherwise

This is in the contract between MyCo and Cons1. At the moment, I am owed for July, and the days worked so far in August.

What do you think?

[mudskipper]

Thanks eek

There is a clause related to taxes, which reads similarly to the clawback clause you mentioned-

If we or any of our related bodies corporate are or become liable for the payment of any taxes, we may deduct the amount of our liability or prospective liability for the taxes of any amount due by us to you, whether under this agreement or otherwise

This is in the contract between MyCo and Cons1. At the moment, I am owed for July, and the days worked so far in August.

What do you think?

Are you an IPSE member? If so, worth dropping them an email on this - the legality of these sorts of clauses needs challenging. However, on the face of it, it looks like you're screwed.

[eek]

Thanks eek

There is a clause related to taxes, which reads similarly to the clawback clause you mentioned-

If we or any of our related bodies corporate are or become liable for the payment of any taxes, we may deduct the amount of our liability or prospective liability for the taxes of any amount due by us to you, whether under this agreement or otherwise

This is in the contract between MyCo and Cons1. At the moment, I am owed for July, and the days worked so far in August.

What do you think?

do you have IPSE membership? If so call them otherwise

Find a decent lawyer - this is going to get very messy very quickly.....

I'm also tempted to say give WTT and/or QDOS a ring - not because it's 100% their field but they may well know suitable law firms to speak to...

[jamesbrown]

Despite the length of this reply, I don't have a tremendous amount to add beyond what eek has said. OP, as you've realised, you're in a bit of a mess here. This sort of situation was predictable and predicted, I'm afraid.

It was agreed with Cons1 that MyCo was providing a contracted out service to Cons1, and Cons1 was providing a contracted out service to Cons 2. It was also agreed that as Cons1 is consider a “small business”, then the responsibility for determining status was with MyCo.

First, what matters is the size of the end client, not the Fee Payer.

Second, whether a service is fully contracted out is a matter of fact, not agreement. A fully contracted out supply occurs when the service provider is fully responsible for delivering the service and does not supply human resources to their client.

Regardless, all this determines is where the responsibility lies for issuing an SDS and who your end client is w/r to Chapter 10. For example, if Cons2 were delivering a fully outsourced supply to their end client, then Cons2 would be your end client and hence responsible for issuing an SDS.

In this sense, I think you've confused the implications of delivering a fully outsourced supply, which is really only to determine who in the chain is your end client. It does not exempt you from Chapter 10 (or transfer from Chapter 10 to Chapter 8), as would be the case if the end client were small or fully overseas. Of course, changing the end client does change the determination w/r to the size of the end client, which could in turn shift the status from Chapter 10 to Chapter 8 (old rules).

In other words, if Cons2 is delivering a fully contracted out service to their end client, then Cons2 is the end client in your chain and its the size of Cons2 that matters, not Cons1, who remains the Fee Payer. Otherwise, the "end client" is the end client in your chain.

Today I received an email from Cons2 with a Status Determination Statement and a CEST form, stating that I would be regarding as an employee if I was directly engaged by Cons2. They also state that the SDS covers the period from October 2021 to date, and that an SDS was not previously issued as Cons2 were previously informed that I was an employee of Cons1, and therefore IR35 regulations would not have applied. Note, I have been extended twice during this time.

Right, yes, oh dear. So it could be that Cons2 is delivering a fully outsourced supply to their end client (who is not then your end client under Chapter 10) and, since Cons2 is now your end client, they are responsible for the SDS under Chapter 10 and they have issued one.

Can anyone give me some practical advice as to what I should be doing in this situation? I mean it will totally depend on what Cons2 want to do. But is their SDS valid? As to me it looks like they have not exercised reasonable care in putting it together. I know I can also appeal it, as I do not agree with a number of points in the CEST form, as well as not agreeing that Cons2 are responsible for performing the SDS in the first place. But it does not feel like it is even worth appealing it.

Reasonable care and being timely are two different things w/r to the SDS. An SDS must be issued before the first payment is made by the end client (in this case, probably Cons2) and, just because you have been paid, doesn't mean your end client has made a payment yet, although if this is a long-term gig they probably have. Reasonable care is defined w/r to the contents of the SDS.

Realistically, the supply chain has probably erred. I wouldn't necessarily assume that Cons2 is the end client. It could be that their end client is really your end client, but that will depend on the facts (as above). Regardless, you are now in a pickle. In theory, the liability rests with the supply chain above YourCo when a timely SDS has not been issued and with reasonable care. That is what the legislation intended. In reality, HMRC don't give a stuff about this and consider the resolution of the situation to be a "commercial arrangement" between the contracting parties, once they have received their money from the Fee Payer and/or end client.

Given your subsequent post about the clawback clause, you are in a tight spot and will probably be pursued under the contractual arrangements. Your best bet is to contact your IR35 insurance provider, in the first instance, or IPSE if you are a member. I am not suggesting that your IR35 insurance will cover you in this situation, but they should be able to offer some advice.

[Snooky]

Thanks eek

There is a clause related to taxes, which reads similarly to the clawback clause you mentioned-

If we or any of our related bodies corporate are or become liable for the payment of any taxes, we may deduct the amount of our liability or prospective liability for the taxes of any amount due by us to you, whether under this agreement or otherwise

This is in the contract between MyCo and Cons1. At the moment, I am owed for July, and the days worked so far in August.

What do you think?

Personally I'd chase the July payment with some vigour and also suspend services immediately, assuming your contract doesn't forbid that. Because they may only "deduct the amount of our liability or prospective liability for the taxes of any amount due by us to you", it makes sense to immediately minimise the amount of money they still owe you.

What do Cons1 have to say about it all? What does the End Client have to say?

In your position I'd already have written off any future work on this contract and be looking for something new. Of course it may all get sorted out to your benefit but it doesn't look that way.

As for your liability for IR35 taxes to date, my understanding is that if the company responsible for doing a status determination (End Client in this case I believe) fails to do one, they're liable for those taxes. But I'm happy to be corrected by more knowledgeable people.

[eek]

Personally I'd chase the July payment with some vigour and also suspend services immediately, assuming your contract doesn't forbid that. Because they may only "deduct the amount of our liability or prospective liability for the taxes of any amount due by us to you", it makes sense to immediately minimise the amount of money they still owe you.

What do Cons1 have to say about it all? What does the End Client have to say?

In your position I'd already have written off any future work on this contract and be looking for something new. Of course it may all get sorted out to your benefit but it doesn't look that way.

As for your liability for IR35 taxes to date, my understanding is that if the company responsible for doing a status determination (End Client in this case I believe) fails to do one, they're liable for those taxes. But I'm happy to be corrected by more knowledgeable people.

The End client is liable but the way the calculations work are such that it makes financial sense to push the liability down to the contractor.

Which is why I asked if the contract had a clawback clause because the one way an agency can minimises the cost is by recovering the money from the contractor and reissuing it with tax paid.

* again it needs jamesbrown to confirm this (just to confirm I'm not talking rubbish) but here is a quick example

Say you receive £10,000 from the agency (and I'm using very rough figures here)...

if the agency succeeds in clawing the money back they can use the £10,000 to make deemed payments. So you end up with £5000 and the agency has £5000 to pay the tax bill.

If the agency fails to claw the tax back they have to pay the tax on an after tax payment of £10,000... I.e. £10,000 or so...

The above is the reason why DWP's fine were so large......

[kempc23]

Thanks everyone for the helpful replies.

I have done a calculation of inside vs outside, on a day rate of £850pd, and it looks like there will be additional tax of £16,500 to pay (based on the 11 months from October to end of August). Does that sound about right? If so, it doesnt sound THAT bad.

The other thing is, the day rate I am on, is very high, and honestly, well above market rates. probably by about £150pd. So if I left to go elsewhere, I would probably be looking at £700 ish per day. Perhaps the day rate was based on it being inside IR35 role after all

Am I missing anything obvious? I am worried that I am. I have spoken to a Solicitor this morning, and he is currently reviewing all the documents and correspondence.

[jamesbrown]

eek

Right, the agency would look to apply a deemed payment and then claw back the money owed from the contractor, not necessarily in that order (i.e., they will probably look to use the contractual clauses immediately).

OP, regarding your calculation, it's impossible for us to say what extra might be owed because that depends on what tax you have paid, how many days you worked etc. That said, your calculation seems low to me if you worked most of that period. You will need to account for ErNi, EeNi, PAYE and the App. Levy because that's what the agency will need to pay. Then you have the accounting mess to sort out on your end, of course. You're probably looking at something like 50-55% take home, after tax.