The off-payroll working rules (IR35)
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 tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.
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, tax and National Insurance contributions must be deducted from fees and paid to HMRC.
There is a tool available which will enable you to check your status. We would suggest that you save a copy of the result as HMRC have confirmed that they will stand by the determination made. Please see https://www.gov.uk/guidance/check-employment-status-for-tax for further details.
Employment status for tax purposes is whether a worker is employed or self-employed. It’s used to determine the taxes the worker and client need to pay.
When the rules apply
The rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.
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’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.
If you’re a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.
Changes to off-payroll working for clients effective April 2021
Off-payroll working rules change on 6 April 2021 and are applied differently. From this date, all public authorities and medium and large sized clients will be responsible for deciding the employment status of workers (sometimes known as contractors).
Who the rules apply to
Some rules already apply to all public sector clients, but from 6 April 2021 medium and large-sized private sector clients also need to apply them. The private sector includes third sector organisations, such as some charities.
The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- 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.
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 a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
When you need to start applying the rules
Public sector clients
You must continue to apply the rules when the changes come into force on 6 April 2021. However, from this date there are extra responsibilities that will affect you.
Private sector clients
If you meet the simplified test conditions you must start applying the rules when the changes come into force on 6 April 2021.
If you use the simplified test to determine your size, you must apply the rules from the start of the tax year following the end of the calendar year when you met the conditions.
If you do not use the simplified test and do not meet the conditions on 6 April 2021, your circumstances may later change. If you then meet the conditions for 2 consecutive years, the date you need to apply the rules will be different. You must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.
What you need to do as a client
You’ll need to determine the employment status of a worker. You must do this for every contract you agree with an agency or worker. You should communicate your determination using a Status Determination Statement (SDS).
An SDS must:
- be passed to the worker and the person or organisation you contract with
- give your conclusion and the reasons for coming to it
You must take reasonable care when making a determination. You can issue an SDS before 6 April 2021 if the rules apply.
You’ll also need to:
- make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from your determination
- confirm the size of your organisation if asked by the person or organisation you contract with, or the worker
If you are also the fee-payer and the off-payroll working rules apply, you will need to deduct and pay tax and National Insurance contributions to HMRC.
You can use the Check Employment Status for Tax service to help you decide if the off-payroll working rules apply.
Small-sized private sector clients
If you’re a small-sized client in the private sector you will not have to decide the employment status of your workers. This will remain the responsibility of the worker’s intermediary (usually a limited company). However, you must confirm your size if asked by the person or organisation you contract with, or the worker. This is to make sure that you, agencies and workers can consider what rules apply.
Taking reasonable care when making a determination
You must take reasonable care when you make a determination about the employment status of a worker.
Failure to do so will result in the worker’s tax and National Insurance contributions becoming your responsibility.
Read more about taking reasonable care.
Who to tell about your determination
From 6 April 2021 you must tell the worker and the agency, or other organisation you contract with, your determination. Do this whether your determination shows that the off-payroll working rules will apply or not.
You must also provide reasons for your determination.
The responsibility for deducting tax and National Insurance is yours until you tell the worker and the person or organisation you contract with of your determination and the reasons for it.
If the working practices of the engagement change or you negotiate a new contract with the worker, you need to make sure that you re-check the rules to see if they still apply.
An engagement is the specific contract or piece of work that a worker is undertaking. For each engagement, whether the off-payroll working rules apply is determined by the:
- terms and conditions
- working practices
When a client is overseas
If your organisation is based wholly overseas the off-payroll working rules do not apply. The worker’s intermediary (usually a limited company) will be responsible for determining if the rules apply.
Your organisation is classed as overseas if it does not have a UK connection.
You will have a UK connection if you either:
- are resident in the UK
- have a permanent establishment in the UK
What to do if a worker or deemed employer disagrees with your determination
A worker or deemed employer may disagree with the employment status determination you reached.
If this happens you will need to:
- consider the reasons for disagreeing given to you by the worker or agency paying their intermediary
- decide whether to maintain the determination if you feel it is correct and give reasons why – or provide a new determination because you feel it was wrong
- keep a record of your determinations and the reasons for them, as well as records of representations made to you
- confirm which date your determination is valid from
A disagreement can be raised with you until the last payment is made for the worker’s services.
You must provide a response within 45 days of receiving notification that the worker or deemed employer disagrees with your employment status determination. During this time you should continue to apply the rules in line with your original determination.
You must introduce a process from 6 April 2021 to make sure you consider your worker’s views if they disagree with your decision.
After considering a disagreement
You should either:
- tell the worker if your determination has not changed
- tell the deemed employer and the worker if your determination has changed
Failure to respond within 45 days will result in the worker’s tax and National Insurance contributions becoming your responsibility.
The above notes were extracted from the gov.uk website