The original requirements of IR35?
In its simplest terms, IR35 is about employment status. It is not a new piece of legislation, as it originally came into force on 6 April 2000 and is properly known as the Intermediaries Legislation and is contained in Chapter 8 Income Tax (Earnings and Pensions) Act 2003.
It is more commonly known as IR35 and took its name from the Inland Revenue (IR) press release in March 1999 that announced its creation. It was introduced as a counter-avoidance measure to address the Government’s perceived view that individuals were exploiting the system and gaining both tax and national insurance contributions (NIC) advantages by providing their services through an intermediary.
An intermediary can be a company (PSC: Personal Service Company), a partnership, an unincorporated association or an individual.
Broadly, the IR35 rules look to target those individual workers who would have been an employee of the end-client had it not been for the intermediary. In essence, you are looking at employment status and if the particular working arrangements and/or contract in place would constitute employment or self-employment if you were to strip away the intermediary (e.g. a PSC).
It is the intermediary’s (e.g. a PSC’s) responsibility to consider the hypothetical relationship between its worker and the end-client to determine if the IR35 rules do or do not apply.
There are no hard and fast rules that determine whether or not an engagement is caught under the IR35 rules so you must look to employment status case law established over the years to consider whether or not the engagement would be one of employment (inside IR35) or self-employment (outside IR35).
Where it is found that the IR35 rules apply then the fees payable to the intermediary have to be subject to a deemed employment tax deduction, which is essentially a charge to PAYE tax and Class 1 NIC as though the fees were received by the worker as employment income. The deemed employment payment is calculated at the end of the tax year.
Where it is considered that the IR35 rules do not apply, then the fees received by the intermediary are not subject to a deemed employment payment calculation. The intermediary is free to decide what remuneration and in what form (salary/dividends) the director takes their payment.
Where an individual worker is providing their services to an end-client via their own intermediary, they have to consider the IR35 rules for each new contract or working arrangement they enter into with that end-client. This means it is possible that, during a tax year, some engagements could be inside IR35 and others outside IR35.
Off-Payroll Working: Public Sector April 2017
Whilst the IR35 legislation has been in place for a number of years, it was felt by the Government that off-payroll working was still a risk area and that the anticipated increase in collection of the additional tax and Class 1 NIC due where engagements are caught under the original IR35 rules had not materialised.
As a result of the Government’s perception that IR35 was not working in the war against ‘false self-employment’, the off-payroll working in the public sector rules were introduced. This legislation can be found in Chapter 10 Income Tax (Earnings and Pensions) Act 2003 and came into effect from 6 April 2017.
These provisions apply when the following conditions are all met:
- The worker personally performs services, or is under obligation to personally perform services for the end-client;
- The end-client is a public authority; and
- The services are provided under circumstances where, if the contract had been directly with the end-client, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office with the client, or the worker actually is an office holder with the client.
The off-payroll rules look to ensure that individuals who provide their services through their own limited company pay employment taxes and Class 1 NIC similar to other employees who are not providing their services through an intermediary such as a PSC.
These rules remove the responsibility from the individual worker’s intermediary to decide if the off-payroll rules apply to the working arrangement with the public authority. It is the responsibility of the public authority to decide if the off-payroll rules apply. It should be remembered that the underlying employment status considerations have not changed. The public authority still has to look to the particular working arrangements and/or contract in place and consider if it would it be one of employment or self-employment if you were to ignore the worker’s intermediary.
The public authority has to inform the party(s), with whom they have the contract to provide the services, of their decision as to whether or not the off-payroll rules apply. In addition, there can be other parties in the contractual chain besides the public authority and worker’s intermediary, such as an agency. If the public authority does not notify the party with whom it holds the engagement contract of the worker’s status, that party may request in writing that the public authority provides the necessary information.
The party can also ask the public authority how they arrived at the decision that the rules applied and the public authority must, within 31 days of receiving either request, provide a written response explaining their reasons and how the decision was made. If the public authority doesn’t reply within the 31 days, they become responsible for accounting for PAYE/NIC on the payments made.
Where the off-payroll rules apply, the public authority (or third-party fee-payer, where applicable) must deduct PAYE tax and Class 1 NIC from the deemed direct payment made to the intermediary and pay this over to HMRC as it would for directly-engaged employees.
The fee-payer is the lowest party within the supply chain before the intermediary and is the party who is paying the worker’s intermediary – typically this would be an agency.
There is a specific calculation to work out the deemed direct payment, which is carried out when the payment is to be made to the intermediary. The fee-payer will also be liable for the employer’s Class 1 NIC due on the payment to the worker’s intermediary and have to apply the apprenticeship levy and make any necessary payments, where applicable.
The worker is not an employee of the public authority (or fee-payer, if different) and, therefore, is not entitled to statutory payments or to be automatically enrolled into the public authority’s (or fee-payer’s) pension scheme. The public authority is not responsible for deducting any student loans from the worker and the worker is also not entitled to any employment rights from the public authority (or fee-payer if different).
The fee-payer will need to provide the worker with a new-starter checklist to obtain the necessary information to enable the worker to be processed on the fee-payer’s payroll. Thereafter, the deemed direct payment (once processed through the fee-payer’s payroll) will be submitted to HMRC under the Real Time Information (RTI) process with the worker’s personal information included, not that of their intermediary.
The fee-payer will pay the worker’s intermediary the net payment (plus VAT if applicable) after tax and NIC has been deducted for the worker’s services.
There are specific accounting principles that the worker’s intermediary needs to consider when taking account of any deemed direct payments the intermediary has had applied. In general terms, the worker is able to set off amounts up to the deemed direct payments in respect of the services performed to a public authority against any remuneration/dividends withdrawn from their intermediary.
Where the worker does not agree with the decision of the public authority when an inside scope decision is made, there is no formal appeal process. However, the worker can contact HMRC if they consider they have not paid the correct tax and Class 1 NIC and discuss the position with them. It is not clear whether or not HMRC would involve themselves in taking the matter further with the public body.
The off-payroll rules take precedent over the Construction Industry Scheme (CIS), so where the new rules apply, CIS does not.
Off-Payroll Working: Private Sector and Public Sector April 2021
It was almost inevitable that the Government would look to introduce the off-payroll working rules into the private sector, following their opinion that the public sector off-payroll working reforms had been a great success.
The changes were initially to be introduced from 6 April 2020 but were put back to 6 April 2021 due to the covid-19 pandemic and its impact on the UK economy.
The new off-payroll working rules are very similar to those already in place within the public sector but there are a few extensions to the current legislation found in Chapter 10 Income Tax (Earnings and Pensions) Act 2003 which will also apply to the public sector from 6 April 2021.
The new off-payroll working rules in the private sector will only apply to medium and large businesses, with an exemption in place for small businesses, with the definition of a small company mirroring the definition found in the Companies Act 2006. This states that where two or more of the following are satisfied the business will be small:
- an annual turnover of not more than £10.2m;
- a balance sheet total of not more than £5.1m; and
- the number of employees is not more than 50.
There are additional rules to consider when looking at a group position and/or connected persons when establishing if the ‘small’ criteria are met.
Where the end-client in the private sector does meet the definition of ‘small’, it will not be required to consider the new off-payroll rules and the responsibility to determine if the IR35 rules apply will stay with the worker’s intermediary, as it is at the moment.
The small business test is only relevant to the end-client position. If within the contractual chain there is a small-sized business fee-payer, who is not the end-client, they will be responsible for applying the new off-payroll rules where the end-client has decided they apply.
The end-client will need to consider whether or not the new off-payroll rules apply to contracts entered into with any individual worker provided through an intermediary. This includes those engaged directly or through third parties such as an agency.
The end-client will need to carry out a status determination to establish whether or not the individual worker would be an employee or office holder of the end client, if they were directly engaged by the end-client. Again, it is important to remember that the underlying employment status considerations are not changing. The end-client still has to look to the particular working arrangements and/or contract in place and consider if it would it be one of employment or self-employment if you were to ignore the worker’s intermediary.
The end-client, using ‘reasonable care’, has to provide a Status Determination Statement (SDS), which has to confirm whether or not the new off-payroll rules do or do not apply and which must also include their reasons for the decision. This decision can be reached by using HMRC’s on-line Employment Status Tool known as CEST (Check Employment Status for Tax), if so required.
The end-client must pass the SDS to the party with whom it contracts and also provide a copy to the underlying worker directly. Where there are additional parties in the chain, each party must pass the SDS down the contractual chain until it reaches the party above the worker’s intermediary; this is the fee-payer. Then, the fee-payer, as long as they satisfy the qualifying conditions, will be responsible for calculating the deemed direct payment and operating PAYE tax and Class 1 NIC for those engagements within the new rules.
Where the fee-payer does not meet the qualifying conditions, the next lowest qualifying person in the chain will become the ‘deemed employer’ and will be responsible for calculating the deemed direct payment and operating PAYE tax and Class 1 NIC for those engagements within the new off-payroll rules. Where the SDS advises that the new off-payroll rules apply, the fee-payer or deemed employer (where different) will be required to include the individual worker on their payroll and account for the PAYE tax and Class 1 NIC – including the employer’s NIC – on the deemed direct payment. The apprenticeship levy will also be due where applicable and the NIC employment allowance cannot be used against payments for deemed employees.
The underlying worker will not be an employee of the fee-payer or deemed employer (where different) for employment rights purposes, and so is not entitled to statutory payments, auto-enrolment into pension or employment rights. The fee-payer or deemed employer is also not responsible for deducting student loan repayments from the worker.
Where there are a number of parties within the contractual chain, each entity has the responsibility to pass the SDS down the chain to the next relevant party. Failure to forward the SDS to the next party leaves the holder of the SDS liable to the operation of PAYE (where the new rules apply) as they remain the fee-payer until the SDS has been correctly passed on. In addition, the fee-payer or deemed employer (where different) will need to provide the worker with a new-starter checklist to obtain the necessary information to enable the worker to be processed on their payroll.
The deemed direct payment, once processed through the fee-payer’s or deemed employer’s payroll, will be submitted to HMRC under the Real Time Information (RTI) process with the worker’s information included rather than that of their intermediary. The fee-payer will pay the worker’s intermediary the net payment (plus VAT if applicable) after PAYE tax and Class 1 NIC has been deducted for the worker’s services.
As indicated above, there are specific accounting principles that the worker’s intermediary needs to consider when taking account of any deemed direct payments the intermediary has had applied.
Where the SDS advises that the new off-payroll rules do not apply, the fee-payer can pass the payment onto the worker’s intermediary without deducting PAYE tax and Class 1 NIC.
The end-client will be required to have a process in place for dealing with challenges to the employment status decision. It is only the individual worker and the deemed employer (which could also be the fee-payer) who can dispute the decision made.
The end-client has 45 days starting from the date that representations are received to respond. During this time the original status determination remains valid. The end-client (once it has completed its review) will either advise that it considers the SDS issued was correct and explain why or provide a revised SDS to replace the original one issued. If the worker still disputes the SDS following the review process they can look to existing tax and NIC processes regarding their personal tax and national insurance liability and make representation to HMRC.
Responsibility for the PAYE tax and Class 1 NIC liability due on the payment to the intermediary could transfer up the contractual supply chain, including to the end-client, in instances where HMRC are unable to collect the liability from the relevant party in the chain.
With over 20 years in this field, The Guild have the expertise to advise on all IR35 matters and ensure that you are not caught out by unnecessary PAYE and National Insurance liabilities from April.
For a no obligation consultation, call us on 020 8515 2975 or email us at email@example.com.
This article was originally published on the accountingWEB Insight Exchange on 16th December 2020.