Do Agencies Know They Should Put IR35 Contractors On Their Payroll

[Athena9000]

Saw the information below on https://www.gov.uk/guidance/fee-paye...-the-fee-payer and https://www.gov.uk/guidance/april-20...intermediaries
So why are almost all the agencies still saying a contractor must use an umbrella company if the contract is inside IR35, when a contractor has his own limited company, should they not place the contractor on the agency's payroll and pay the contractor's limited company after NI, tax, employer National Insurance contributions and Apprenticeship Levy have been deductions?

The information below shows that:
1. If for example the agency is the fee payer then they will have to deduct all the taxes before paying the contractor's LTD company
2. The contractor's LTD company does not have to pay any NI or Income Tax the second time as NI and tax has already been deducted by the fee payer which will be the agency if the contractor is working through an agency.
3. It goes on to say how a contractor should withdraw the income from his own LTD company by either:
- a salary through your payroll – but do not deduct Income Tax or National Insurance contributions
Or
- dividends – these do not need to be recorded on your worker’s Self Assessment return.

https://www.gov.uk/guidance/fee-paye...-the-fee-payer

Check if you’re the fee-payer

In most cases the organisation paying a worker’s intermediary will be the fee-payer.

To be a fee-payer, you must be the lowest party in the labour supply chain. This is usually the party paying the worker’s intermediary.

As a fee-payer you must meet the following qualifying conditions:

• be resident in the UK, or have a place of business in the UK
• pay an intermediary that is controlled by the worker or associate of the worker
• not be controlled, or material interest not be held, by either:
  • a worker, alone or with one or more associates of a worker
  • an associate of a worker, with or without other associates

You should not deduct Income Tax and employee National Insurance contributions, or pay employer National Insurance contributions or Apprenticeship Levy, if applicable, as responsibility will pass to the next party above you in the labour supply chain, if you do not:

• meet the qualifying conditions
• receive the determination

You may want to ask the client or agency immediately above you in the labour supply chain why you have not received a status determination. If you are the agency the client contracts with, you can ask the client to confirm its size.

If no other party in the supply chain meets the conditions, the client becomes responsible.

Your responsibilities as the deemed employer

When you receive the worker’s employment status determination and the off-payroll working rules apply, you must:

• calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
• deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
• pay employer National Insurance contributions
• report to HMRC through Real Time Information the Income Tax and National Insurance contributions deducted
• use the ‘off-payroll worker subject to the rules’ indicator in PAYE Real Time Information (the name of this indicator may be shown differently in your software

https://www.gov.uk/guidance/april-20...intermediaries

Your responsibilities from 6 April 2021

Income Tax and National Insurance

If your worker provides services to a small client outside the public sector and the off-payroll working rules apply, you (the worker’s intermediary) will continue to be responsible for:

• deciding the employment status of your worker
• deducting Income Tax and National Insurance contributions from your worker’s fees and paying them to HMRC

Read more about the off-payroll working rules if your worker provides services to small clients outside the public sector.

If your worker provides services to a public sector client, or a medium or large-sized client outside the public sector, the deemed employer is responsible for:

• deducting Income Tax and employee National Insurance contributions and paying them to HMRC
• paying employer National Insurance contributions and Apprenticeship Levy, if the off-payroll working rules apply

Paying your worker

Your payment for your worker’s services will have already had Income Tax and National Insurance contributions deducted from them if both:

• your worker provides services to a public authority or to a medium or large-sized client outside the public sector
• the off-payroll working rules apply

This means when you pay your worker they do not need to pay Income Tax and National Insurance contributions again on those fees.

You can do this by either paying it as:

• a salary through your payroll – but do not deduct Income Tax or National Insurance contributions
• dividends – these do not need to be recorded on your worker’s Self Assessment return

As the amounts have already been treated as employment income doing it this way will avoid any double payment of Income Tax or National Insurance contributions.

[hobnob]

So why are almost all the agencies still saying a contractor must use an umbrella company if the contract is inside IR35, when a contractor has his own limited company

Looking at the page you linked to, there's a list of "Related content" on the right hand side. In particular, that includes:
Employment status: employment intermediaries - GOV.UK (www.gov.uk)

"You do not have to apply these rules if your workers are employed through an umbrella company and they:

• employ the workers
• deduct PAYE"

So, that answers your first question, i.e. why agencies ask contractors to use an umbrella.

should they not place the contractor on the agency's payroll and pay the contractor's limited company after tax deductions?

If the contractor is on the agency payroll then the net salary (after tax/NI) would be paid directly into their personal bank account, not the limited company's bank account.

[Athena9000]

If the contractor is on the agency payroll then the net salary (after tax/NI) would be paid directly into their personal bank account, not the limited company's bank account.

I have added more information above. It talks about checking if you’re the fee-payer and paying your worker. This information shows that:
1. If the agency for example is the fee payer then they will have to deduct all the taxes before paying the contractor's LTD company
2. The contractor's LTD company does not have to pay any NI or Income Tax the second time as NI and tax has already been deducted by the fee payer which will be the agency if the contractor is working through an agency.
3. It goes on to say how a contractor should withdraw the income from his own LTD company by either:
- a salary through your payroll – but do not deduct Income Tax or National Insurance contributions
Or
- dividends – these do not need to be recorded on your worker’s Self Assessment return.

[northernladuk]

Because the agencies don't want to run PAYE?

Also for many of the big clients that have banned PSC's they mandate umbrella's don't they?

[eek]

Agency payroll - subject to agency regulations

Paid via an umbrella firms - can be forced to opt out of them

it’s one of the things we are emphasizing in the current review

[ComplianceLady]

This really isn't (IMO) anything to do with wanting to run a PAYE payroll or not. Deemed payments are a pain and anything that slows the process down is to be avoided so even if you run a PAYE payroll inside is avoided. Most agents (I speak from long experience!) don't really understand IR35 and when they say 'inside IR35' they mean PAYE only - that can be direct PAYE or umbrella PAYE, I've only seen one SDS declaring inside status. In reality the client says 'inside' the agents hear 'non-ltd' and the candidates divide themselves into willing to work inside or not. There is more risk in doing true inside IR35 and that's why we don't do it and nor do most agencies - if there was a sudden uptick in demand from clients or candidates agencies would find a way.

Re Conduct Regs - they're in every Agency standard terms with clients - the only thing we use is we can charge a better temp to perm fee and very very rarely if there is a payment dispute you don't have to pay a contractor who opted out even if there's a signed timesheet - I've never used that and I think few agencies would but in theory they are the 2 advantages to having candidates opt out.

More than conduct regs running a direct PAYE means you have to comply with worker status rights - maternity, paternity etc. not major issues but if an agency does a small % PAYE they'll outsource it to save the cost of running a payroll plus the small risk

[malvolio]

This really isn't (IMO) anything to do with wanting to run a PAYE payroll or not. Deemed payments are a pain and anything that slows the process down is to be avoided so even if you run a PAYE payroll inside is avoided. Most agents (I speak from long experience!) don't really understand IR35 and when they say 'inside IR35' they mean PAYE only - that can be direct PAYE or umbrella PAYE, I've only seen one SDS declaring inside status. In reality the client says 'inside' the agents hear 'non-ltd' and the candidates divide themselves into willing to work inside or not. There is more risk in doing true inside IR35 and that's why we don't do it and nor do most agencies - if there was a sudden uptick in demand from clients or candidates agencies would find a way.

Re Conduct Regs - they're in every Agency standard terms with clients - the only thing we use is we can charge a better temp to perm fee and very very rarely if there is a payment dispute you don't have to pay a contractor who opted out even if there's a signed timesheet - I've never used that and I think few agencies would but in theory they are the 2 advantages to having candidates opt out.

More than conduct regs running a direct PAYE means you have to comply with worker status rights - maternity, paternity etc. not major issues but if an agency does a small % PAYE they'll outsource it to save the cost of running a payroll plus the small risk

There are other elements to the Agency Regs compliance around ensuring the worker meets various criteria such as a right to work in the UK, offers proof of identity and meets various employment Ts&Cs, which can be offloaded to the worker's company if they have opted out and which otherwise would have to be done by the agency. Since that equals time and therefore money, something which all agencies are very reluctant to expend if they don't have to, the pressure towards opt out is clear.

Snag is, 90% of agencies in my experience don't have a clue how to do it properly. One day, someone will get burnt.

[eek]

Re Conduct Regs - they're in every Agency standard terms with clients - the only thing we use is we can charge a better temp to perm fee and very very rarely if there is a payment dispute you don't have to pay a contractor who opted out even if there's a signed timesheet - I've never used that and I think few agencies would but in theory they are the 2 advantages to having candidates opt out.

More than conduct regs running a direct PAYE means you have to comply with worker status rights - maternity, paternity etc. not major issues but if an agency does a small % PAYE they'll outsource it to save the cost of running a payroll plus the small risk

Hang on are you saying that opt-out of Agency Regulations is part of the standard T&Cs of the agencies you deal with.

Thanks for confirming the level of the abuse...

[ComplianceLady]

There are other elements to the Agency Regs compliance around ensuring the worker meets various criteria such as a right to work in the UK, offers proof of identity and meets various employment Ts&Cs, which can be offloaded to the worker's company if they have opted out and which otherwise would have to be done by the agency. Since that equals time and therefore money, something which all agencies are very reluctant to expend if they don't have to, the pressure towards opt out is clear.

Snag is, 90% of agencies in my experience don't have a clue how to do it properly. One day, someone will get burnt.

Most Agencies don't offload them though. They are in the standard terms - agencies are driven by what clients want and clients expect these things to be done so most agencies have a process to do that. Honestly I've had so many conversations over the years about the opt out process and in my experience agencies want opt out so they can charge a higher temp to perm fee and because it's easier - their processes are set up for the 99% who do opt out.

[ComplianceLady]

Hang on are you saying that opt-out of Agency Regulations is part of the standard T&Cs of the agencies you deal with.

Thanks for confirming the level of the abuse...

No. I'm saying that compliance with the conduct regs is in the terms. Most agencies get their terms from an industry body and adapt them. All of those terms assume compliance with regs so will have 'this is the information we provide, this is what you provide, this is what we check, this is what we charge' etc. It's onerous to include 'we only check this if the candidate is not opted out' options (and looks dodgy) so they don't. So EVEN when the candidate opts out the agency is contractually obliged to comply AND clients expect it anyway. Honestly there's A LOT agencies do that is not a fair way to do business - they don't push opt outs so they can swizz candidates or clients.

I do think umbrella companies might have more reason to push opt out, and many have agent clauses that enable them, once the worker has signed, to opt out on their behalf, but I really think this is one crime agencies ain't guilty of.