Finding the end user in IR35 supply chains | Fieldfisher
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Finding the end user in IR35 supply chains


United Kingdom

Fieldfisher's IR35 specialists look at how to determine who the 'end client' is in any given engagement.
On 6 April 2021, the compliance burden to ensure working practices are compliant with IR35 shifted from the worker (and their intermediary) to private sector 'clients' (or 'end users').

As a reminder, IR35 applies where:
  • A 'worker' personally performs services for a 'client';

  • Those services are provided under arrangements involving an 'intermediary' (such as a limited company); and

  • The circumstances are such that if the arrangements had been made directly between the worker and the client, the worker would be regarded as employed by the client.

In the simplest labour supply chains, the worker, the intermediary and the client are easily identifiable, and the liability for complying with IR35 can be clearly assigned.

However, in complex supply chains, identifying the client is not always so straightforward.

It is common for several entities – often limited companies – to exist between the worker and the end client, with various business-to-business contracts in place. Such arrangements have evolved as effective ways of engaging and deploying contractors for specific services as part of wider contracts.

In these circumstances, the end client may be unaware that a person performing services for them is an off-payroll worker caught by IR35, as it is easy to assume the worker is an employee of the contractor they have engaged to do the work.  

Unfortunately for end clients, supply chain complexity is not an excuse for not complying with IR35.
The legislation (specifically Schedule 1 of the Finance Act 2020) makes it clear that the end user is responsible for:

 (i)  Identifying and ensuring IR35 compliant working practices; and 
(ii)  In certain circumstances, operating g PAYE (including payment of employer’s NIC).

To avoid being caught out and pursued (and potentially fined) by HMRC, it is important that businesses that use contractors ascertain whether they are the client, and what their obligations are under IR35.

HMRC’s published view on IR35 and complex supply chains

HMRC has published guidance on who it considers to be the 'client' in various contractual chains. Specifically, it states that:

"The client is the person who the worker performs services for […]

"Where a person enters into a contract with an intermediary for the supply of a worker, they will be the client, unless they are an intermediary themselves […]

"Where a person enters into a contract for a fully contracted out service, they will not be the client."

HMRC also stresses that simply relabelling what is in fact a labour supply contract as a contract for a managed service will not absolve the end client from its obligations under IR35.

Where the nature of the contract is disputed, HMRC has indicated it will consider "the commercial reality of the arrangements" to reach a decision.

It should be noted that the above is HMRC's view and is not law.

What next?

To work out whether you are the end client in a labour supply chain for IR35 purposes, it is sensible to conduct a preliminary risk assessment (see flow chart).

If the outcome of the risk assessment suggests that you are likely to be the end client, you should take the following steps:

1. Determine whether any workers operating under the contract are caught by IR35

This means applying the IR35 criteria test outlined above – i.e., check whether there are (i) any individuals who (ii) personally perform services through intermediaries under or as part of the contract.  

This will involve communicating with the other businesses in the supply chain to identify the workers involved under the contract.

2. If workers operating under the contract are caught by IR35, develop a process for IR35 compliance

This will involve:

  • A Status Assessment

As the client, you will be responsible for assessing the tax employment status for any workers operating under the contract who are caught by IR35. Fieldfisher has developed an IR35 status determination tool to assist with this process.

Once you have determined the status of the workers, you need to prepare and communicate your conclusions on status in the form of a Status Determination Statement (SDS) (see "Communication" section below).

You need to ensure you are able to obtain the necessary information under the contract to complete the SDS.
  • Tax deductions

If the status assessment is 'employed' (i.e. the circumstances are such that if the arrangements had been made directly between the worker and you the client, the worker would be regarded as employed by you the client), an obligation to make deductions for tax on payments to the worker/their intermediary will arise. 

You need to know who will be responsible for making these tax deductions – under the IR35 rules, this is normally the entity nearest the intermediary, so understanding the supply chain structure in essential.
  • Communication

You need to communicate your SDS throughout the supply chain. 

This is to ensure the worker(s) caught by IR35 are aware of their determined tax status, and that everyone in the supply chain knows who is responsible for deducting tax under IR35.

You may want to seek warranties and indemnities from your contracting partners, to guarantee tax deductions will be operated by the appropriate person and that you have a means of redress if anyone in the chain fails to meet their obligations.
  • Risk mitigation

If you prefer to avoid IR35 risk altogether, you may insist that your supplier only uses employees/workers who are on the payroll (i.e. subject to PAYE). 

Again, this might be difficult to enforce in complex supply chains, and warranties and indemnities should be sought in relation to this in case you are unwittingly exposed to IR35 through hidden off-payroll working.

Further clarity expected

As IR35 has only been in force for a short period at the time of writing, it is important to bear in mind that the legal concepts discussed here have not yet been tested before the courts.

HMRC has indicated it will take a lenient approach to enforcing IR35 for non-deliberate errors in compliance in the first 12 months from implementation.

However, there remain a number of grey areas in the legislation and disputes between HMRC and private sector businesses affected by IR35 are anticipated in the near future.

The outcomes of these cases should provide further clarity on the government's approach and help companies adapt accordingly.

For more information on Fieldfisher's IR35 expertise and services, including our labour supply chain guidance and IR35 status determination tool, please visit our dedicated IR35 page.