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Off-Payroll (IR35) – what, when, where and how?

  • 5th February 2021

The off-payroll working rules are due to come into force on 6th April 2021 in the private sector following the deferral from last year. But who does it apply to and what impact will it have on your business? We look into these new rules in a bit more detail to provide you with some guidance on whether this new regulation will apply to you.

Will it affect me?

The changes to Off-Payroll (IR35) rules will affect the following according to the HMRC policy paper:

  1. Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
  2. Medium and large-sized organisations outside the public sector that engage with individuals through PSCs.
  3. Recruitment agencies and other intermediaries supplying staff through PSCs.

Existing rules remain in place if an individual engages through a PSC with a small non-public end-user organisation. This means the decision as to whether the rules apply would still lay with the PSC.

HMRC follow the Companies Act definition in determining whether a business is ‘small’. A business fails to be small if it exceeds two out of three of the following criteria:

  • Turnover above £10.2m
  • Gross Assets above £5.1m
  • Employees above 50

What are the Off-Payroll (IR35) working rules?

The off-payroll working rules are designed to ensure individuals working like employees but through their own limited company (often known as a ‘personal service company’ or ‘PSC’), or other intermediary, pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed.

With effect from 6 April 2021, many contractor pay arrangements will change as the responsibility for the determination shifts.

This will apply to engagements with medium or large-sized organisations in the private and third sectors. Responsibility will shift for operating the off-payroll working rules from the individual’s PSC, to the organisation or business that the individual is supplying their services to or the ‘end-user’.

According to the HMRC guidelines, if you contract for a medium or large-sized non-public sector organisation:

  • From 6 April 2021, your client will be responsible for deciding your employment status for tax for the services you provide them. They should provide you with a ‘Status Determination Statement’ if the rules apply, setting out and explaining their decision.
  • If your client determines that your contract is inside the off-payroll working rules and so you are a deemed employee for tax purposes then your client, or the agency who pays your fees, will also be responsible for deducting Income Tax and NICs before they pay you.
  • You will still need to submit a tax return, but relief is available on the tax already paid.
  • For the tax year 2020 to 2021, your limited company or other intermediary will remain responsible for operating the off-payroll working rules and accounting for and paying the relevant Income Tax and NICs.

How to determine if the off-payroll (IR35) rules apply

There are three key tests that must be considered when determining employment status and whether IR35 applies. These are:

  • Personal service/substitution: Has the client specifically hired you personally or, do you have an ‘unfettered’ right of substitution?
  • Control: Does the client control you? This looks at control over ‘what’, ‘where’, ‘when’ and most importantly ‘how’ you perform your job.
  • Mutuality of obligation (MOO): Are you obliged to continually accept work offered, and is the client obliged to continually offer you work?

There are also a number of other factors to consider, such as whether you expose yourself to financial risk, whether you can demonstrate that you are in business in your own right, and whether you use your own equipment to complete the job.

There has been some concern that some medium and large sized business may just apply a blanket policy to ensure they do not fall foul of the rules. HMRC states however that clients cannot use this approach. They go on to say:

  • Applying a decision to a group of off-payroll workers with the same role, working practices and contractual terms may be permissible in some circumstances, but it is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working arrangements.
  • It is natural that businesses will consider whether limited companies or other intermediaries are the best way to engage you, and other contractors, if you are working like employees. This is a business decision for organisations to make, and organisations will be free to decide how they engage their workers.
  • Some organisations might decide to move you onto an employment contract or engage you through an agency rather than directly, while other organisations may choose to continue engaging you through your own limited company where this suits their business model.

What do I need to do?

The HMRC issued guidance on what you need to do to prepare.

  1. Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.
  2. Determine if the off-payroll rules apply for any contracts that will extend beyond April 2021. You can use HMRC’s Check Employment Status for Tax service to do this.
  3. Start talking to your contractors about whether the off-payroll rules apply to their role.
  4. Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.

More guidance in relation to the rules can be found here.

If you do need advice or support in relation to how IR35 may impact you, then do get in touch.

Any news or resources within this section should not be relied upon with regards to figures or data referred to as legislative and policy changes may have occurred.