A client of a partnership has decided that a service provided by one of the partners is within IR35 and would therefore be subject to deductions for tax and national insurance via the client PAYE. They have advised the partnership they can no longer maintain the contract of service if it is within the scope of IR35. Could the partnership change to a limited company and add the partner to the ltd co PAYE scheme to maintain the current contractor relationship?

When answering this question, it is important to understand the legislative definition of what is an intermediary. An intermediary can take the form of a partnership, a company or an individual. The conditions of liability for each are described currently in Schedule 1, Part 2 of FA 2017 and to be inserted into ITEPA 2003 from April 2021. HMRC commentary on the conditions of an intermediary can be found in the Employment Status Manual .

Where the conditions of liability are met, the client in receipt of a personal service from a contractor who is providing said service via an intermediary, the client would be obliged to make a determination on the status of the individual providing that service as if there was no intermediary in the chain of supply. This applies to medium/large size clients from April 6th, 2021. The legislation already applies to public authorities. Where a status determination is made by a client and it determines the status of the worker falls within the off payroll working rules, the client would then be obliged to operate PAYE on payments made to the intermediary as if they were earnings from employment. This can be off putting to clients as this will increase the client’s secondary class 1 NIC and apprenticeship levy liability which, in this case, can result in the cancellation of engagements that are within the scope of IR35.

The question of changing from a partnership to a company is not removing the liability under IR35, but simply posing a different question in terms of what form the intermediary is taking. So, when answering the above client query, a partner of a partnership is no doubt going to have a material interest in their newly formed company, so changing the format of the business is not going to remove liability under IR35 on any service that partner provides personally to the client. Furthermore, where a client is obliged to make a determination on status, it will not consider the existing PAYE position of the partner when determining its decision so adding the partner to the newly formed company PAYE will not have an impact. There is still an intermediary in the chain of supply in the form of the company therefore IR35 off payroll working rules will apply.

Further to the above, it is the responsibility of the worker to declare the correct information to the client (ITEPA 2003 section 61U) so they must understand the scope of the legal definition of an intermediary and that this definition can apply to companies.

If a client does make a status determination of the engagement within IR35, the contractor may object to this determination on the grounds they believe why it would not constitute ‘deemed employment’. This is known as a client-led disagreement process. The client must respond to that objection within 45 days. Ultimately the decision still lays with the client and therefore are not obliged to change their original decision, however, if they agreed with the objection the client would need to reissue a new status determination indicating the reasoning behind the change. Where a contractor is unable to change a client’s decision and still feel they have been incorrectly taxed as a result, then existing SATR and NIC processes can be followed.

Relevant Legislation

ITEPA 2003 Chapter 10 – deployed from April 6th, 2021

FA 2017 Schedule 1, Part 2

Relevant HMRC Manuals

Employment Status Manual – ESM10000 (contents page)

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