The fee payer is the party paying the contractor’s PSC; i.e. the entity directly above the contractor’s limited company in the labour supply chain. This could be the client or an agency.
If the off-payroll working rules apply, the fee payer is usually responsible for:
- calculating the deemed direct payment to account for employment taxes and National Insurance contributions (NICs) associated with the contract – essentially the rate payable for the work has to be recalculated as an amount which includes employers NICs and apprenticeship levy, if applicable, and only after these deductions are made, can the net amount be taxed under PAYE to produce a ‘take home’ figure for the contractor.
- deducting Income Tax (PAYE), NICs and apprenticeship levy – in practice this is done by the PSC being added to the fee payers payroll and payments made under RTI.
- paying the Income Tax (PAYE), NICs and apprenticeship levy amounts over to HMRC.
HMRC outline who is categorised as a fee payer in their guidance at: https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules
What defines a fee payer in regards to IR35?
“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 a 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 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.
The concept is relatively straightforward, however it comes with a significant burden for a fee payer agency. If the decision taken by the end client is outside IR35, allowing the PSC to be paid gross. However, HMRC subsequently successfully challenge that decision and determine that tax and NICs should have been deducted. If the end client can demonstrate that it has taken reasonable care in arriving at its decision, HMRC will seek the tax liability from that fee payer agency.
Not surprisingly, recruitment agencies have a vested interest in understanding how IR35 decisions are being made, but above all, ensuring that they are not left paying this unplanned liability.
There are insurance-backed IR35 solutions which can give agencies peace of mind; if you would like to know more, please contact 0333 321 1403