The IR35 Trap

Who Should Pay the Employer’s Contribution?

An unexpected and probably unintended consequence of the IR35 reforms now enacted is that there is confusion over who bears the cost of employer’s NI.

Under the ‘old’ rules (Chapter 8, Part 2, ITEPA 2003), the intermediary (usually the worker’s PSC) bore the brunt but this now lies with the fee payer (usually the agency or pay roll provider).

This problem first emerged in respect of the public sector reforms. In short, the burden of paying the employer’s contribution was no longer a cost for the worker falling foul of the IR35 trap. Not surprisingly, clients were not keen to pick-up the tab. In a recent article in Computer Weekly, we contributed to an in-depth discussion of the problem.

Even before I joined ETC Tax in July last year, I was helping clients in this area. One case went to the County Court, though the claim for a substantial repayment of the employer’s contribution as an unlawful deduction was settled out of court.

The client in that case was a very well-known and respected public body and the agency involved was also well-established. The terms of the settlement mean that no-one involved can be identified and it should be noted that in any event, no liability was accepted or proved.

The claim was that a day rate had been agreed between the client and the worker before any agency was involved. So, when the agency deducted the employer’s contribution from that rate, it seemed to be an open and shut case for an unlawful deduction.

As tax advisers, we can help you as a client or as a fee payer agency or pay roll provider to make sure you don’t inadvertently end-up making unlawful deductions from payments for ‘inside IR35’ engagements.

Even better, we can help you as an end client make sure that your contractual engagements don’t engage IR35 at all so you can carry on engaging the best in the field and your competitive edge.

Alexander Wilson