Understanding off-payroll working IR35

IR35 is a word used to describe two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary were not used.
Contractors who work through their limited company enjoy a level of tax efficiency. While they do not usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.
The off payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client.
An intermediary will usually be the worker’s own personal service company, but could also be any of the following:

  • A partnership
  • A personal service company
  • An individual The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as “IR35”.

Who the rules apply to?

You may be affected by these rules if you are:

  • A worker who provides their services through their intermediary
  • A client who receives services from a worker through their intermediary
  • An agency providing workers’ services through their intermediary If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid to HMRC. In addition, employer National Insurance contributions and Apprenticeship Levy, if applicable, must also be paid to HMRC.

The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:

  • You have a balance sheet total of more than £5.1 million
  • You have more than 50 employees Balance sheet total means the total amounts shown as assets in the company’s balance sheet before deducting any liabilities.
    This is in line with the small companies’ regime.

Simplified Test

A simplified test also applies to some clients and considers annual turnover. You must apply the rules if you have an annual turnover of more than £10.2 million and are not: • A company • A limited liability partnership • An unregistered company • An overseas company There are also rules which cover connected and associated companies. If the parent of agroup is medium or large, their subsidiaries will also have to apply the off payroll workingr ules.

When the rules apply

The changes to the off-payroll rules were due to come into effect on 6 April 2020. This has now been delayed until April 2021 because of the spread of the coronavirus (COVID-19) pandemic. The delay is to help businesses and individuals deal with the economic impact of coronavirus. The delay to the introduction of the changes is not a cancellation. A contract for the purpose of the off payroll working rules is a written, verbal, or implied agreement between parties.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off payroll working rules and some which do not.

Before 6 April 2021

If you are a worker and your client is in the public sector, it is their responsibility to decide your employment status. You should be told of their decision.

If you are a worker and your client is in the private sector, it is your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.

From 6 April 2021

From 6 April 2021 the way the rules are applied will change. All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply. If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.

What the changes mean

The changes affect you if you are an agency and you supply workers to:

  • Any public sector client
  • Medium and large-sized private sector clients
  • Another agency who supplies a worker for public sector clients or medium and large-sized private sector clients
    From 6 April 2021, medium and large-sized private sector clients receiving services from a worker will be responsible for:
  • M aking an employment status determination to decide if the rules apply
  • Telling the worker, and agency or other labour provider they contract with of their determination, with reasons for making the determination All public sector clients will remain responsible for deciding if the rules apply. They will become responsible for telling the worker and the agency or other labour provider they contract with of their determination. They must also give the reasons for making the determination.
    The changes mean you as an agency could become liable for paying Income Tax and National Insurance contributions if any of the following apply:
  • You are the fee-payer
  • You are not the fee-payer but do not pass on the client’s determination to the person or organisation you contract with
  • You are the first agency in the labour supply chain

Your responsibilities from 6 April 2021

Income Tax and National Insurance

If your worker provides services to a small private or voluntary sector organisation and the off payroll working rules apply, you (the worker’s intermediary) will be responsible for deducting Income Tax and National Insurance contributions from your worker’s fees and paying them to HMRC.
Read more about the off payroll working rules if your worker provides services to small clients in the private sector. The deemed employer will become responsible for deducting Income Tax and employee National Insurance contributions and paying them to HMRC, as well as paying employer National Insurance contributions and Apprenticeship Levy, if applicable, if both:

  • A public authority, medium-sized or large-sized client makes the status determination
  • The off payroll working rules apply

Paying your worker

Your income for your worker’s services will have already had Income Tax and National Insurance contributions deducted from them if both:

  • Your worker provides services to a public authority or to a medium or large-sized private sector client
  • The off payroll working rules apply This means that when you pay the worker, they do not need to pay Income Tax and National Insurance contributions again on those fees.
    You can do this by either paying it as:
  • A salary through your payroll - but do not deduct Income Tax or National Insurance contributions
  • Dividends – these do not need to be recorded on your worker’s Self-Assessment As the amounts have already been treated as employment income doing it this way will avoid any double payment of Income Tax or National Insurance contributions.

What to do if your worker disagrees with the determination

The client must decide your worker’s employment status and if the off payroll working rules apply. The client must then tell your worker their determination and the reasons for it.
If your worker disagrees, they will need to:

  • Give details of the employment status determination they disagree with
  • Give their reasons for disagreeing
  • Keep copies of any records about disagreements A disagreement can be raised until the last payment is made for the worker’s services.
    The client will have 45 days from the date of receiving the worker’s disagreement to respond. During that time, the fee-payer should continue to apply the rules in line with the client’s original determination. If the employment status determination has not changed, the client will have to tell your worker.
    If the employment status determination has changed, the client will have to:
  • Give a new status determination to your worker
  • Confirm which date the determination is valid from

Reference: GOV.UK Source