In its simplest terms, IR35 and off-payroll working is about employment status. Where an individual worker is providing their services to an end-client through their own personal service company (PSC) or partnership, commonly known as an intermediary, the question arises; would the particular working arrangements in place be one of employment or self-employment if you were to strip away the intermediary?
It is important to remember that employment status is not a matter of choice, rather it is a matter of fact, based on key terms and conditions of the working relationship between both parties. Ultimately when looking at employment status, it is case law, derived over the years, which is used to establish the correct status position.
There are three different areas to consider; IR35 legislation, off-payroll working in the public sector and off-payroll working in the private sector. The issue at stake is the Government’s perceived view that individuals are exploiting the system and gaining both tax and national insurance contributions (NIC) advantages by providing their services through their own PSC or partnership.
Therefore, this legislation has been introduced as a counter-avoidance measure with the aim of ensuring that an individual worker is paying the appropriate amount of tax and NIC.
- This legislation originally came into force on 6 April 2000 and is commonly known as IR35.
- It is the responsibility of the intermediary (e.g. a PSC) to consider the hypothetical relationship between their worker and the end-client to determine if the IR35 rules do or do not apply. That is, if it were not for the intermediary, would the working arrangement constitute one of employment or self-employment.
- Where it is found that the IR35 rules do apply (employment), 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 found that the IR35 rules do not apply (self-employment), 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 worker takes their payment.
Off-Payroll Working: Public Sector April 2017
- The legislation for off-payroll working in the public sector came into effect from 6 April 2017.
- These rules remove the responsibility from the individual worker’s intermediary to decide if the IR35 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.
- 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 rules apply.
- 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.
- The deemed direct payment is processed through the public authority’s (or third-party fee-payer’s) payroll and submitted to HMRC with the worker’s information together with that of their intermediary.
- Where the worker does not agree with the decision of the public authority that they are within the off-payroll rules, 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.
- Where the off-payroll rules do not apply, the public authority (or third-party fee-payer) can pass the payment onto the intermediary without deducting PAYE tax and Class 1 NIC.
- Where the worker, providing their services through their own intermediary, is not working for a public authority end-client, the off-payroll rules do not need to be considered. The intermediary remains responsible for considering whether or not the contract is caught under the IR35 rules.
Off-Payroll Working: Private Sector April 2021
- The new off-payroll working rules are similar to those already in place within the public sector but there are a few extensions. These new extensions 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.
- Where the end-client in the private sector meets the definition of a small business, it will not be required to consider the new off-payroll rules. The responsibility to determine if the IR35 rules apply will remain with the worker’s intermediary.
- The medium or large end-client will need to consider whether or not the new off-payroll rules apply to contracts entered into with any individual worker where those services are provided through an intermediary. This will include those engaged directly or through third parties such as an agency.
- 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.
- 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 fee-payer.
- Where the SDS advises that the new off-payroll rules apply, the fee-payer or deemed employer (where different) must deduct PAYE tax and Class 1 NIC from the deemed direct payment made to the intermediary and pay this over to HMRC.
- The end-client will be required to have a process in place for dealing with challenges to the employment status decision.
Where the SDS advises that the new off-payroll rules do not apply, the fee-payer can pass the payment onto the intermediary without deducting PAYE tax and Class 1 NIC.