In many instances, contractors frequently find themselves working through an employment or recruitment agency, which supplies clients with staff and contractors with work.
Agencies provide a service for both the contractor, in finding them work, and the client, in finding them suitably qualified workers. It is likely, and has been demonstrated through case law, that a significant number of contracts awarded through agencies fall under IR35.
However, the agency is generally not affected in that any tax and National Insurance liabilities arising through the contract have to be met by the contractor, or the contractor′s intermediary.
But agencies should be aware that, following the 2004 Finance Act, clients are increasingly stipulating that the agency is legally obliged only to provide them with contractors paying the correct levels of tax and National Insurance Contributions. So, agencies are more often coming ‘into the frame′ when it comes to ensuring the contractors they supply are ‘legal′ and IR35 compliant.
Where agencies should also be aware of IR35 provisions is in the written agency agreements (contracts) they have with contractors who work through them. Case law has found contractors liable to IR35 related tax and National Insurance payments due to the wording in the contracts they signed with their agency.
In addition there are special rules that might apply where agencies have to operate a PAYE tax-at-source system and pay class 1 National Insurance Contributions. Details of these specialised regulations can be found on HMRC′s website.
The main organisations affected by IR35 are listed below; click on them for further explanations:
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