The government is extending the off-payroll rules, which have been applied in the public sector since April 2017, into the private sector. The new rules will apply to payments made to intermediaries such as personal service companies (PSCs). Importantly, the tests for IR35 status are not changing but the responsibilities for making the IR35 status determination and deducting tax and national insurance are.
From 6 April 2021, the PSC will no longer be responsible for managing IR35. Instead, the end user client must assess the IR35 status of each engagement, and if the client finds that the engagement is ‘inside IR35’, the fee-payer must deduct tax and national insurance before paying the PSC.
A Recap – What does Inside and Outside IR35 mean?
The IR35 rules are set out in Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)1. They apply where an individual (the ‘contractor’ *) works through an intermediary, such as a personal services company (a ‘PSC’ *) and provides their services to an end user client. The IR35 rules provide that if the PSC did not exist, but you, the contractor, looked like an employee of the client for tax purposes, then the assignment is deemed to be ‘inside IR35’. That means that your pay should be subject to PAYE tax and employees’ national insurance contributions (NICs). Employers’ national insurance will also be due.
If the assignment is outside IR35, then PAYE tax and employee and employer NICs are not due but corporation and other taxes may be due.
Tax Status is not the same as employment status. Just because someone is employed for tax purposes does not make them an employee for employment rights purposes.
* For ease we will use the terms ‘PSC’ and ‘contractor’, this could also include temporary workers in this guide.
We also use the terms ‘IR35’ and ‘off-payroll’ rules interchangeably.
What is the extension of the off-payroll rules into the private sector?
The off-payroll rules were implemented in the public sector in April 2017 but are now being implemented in the private sector as of 6th April 2021, having been delayed by 12 months due to the Covid-19 pandemic.
Currently, when you provide your services to a private sector client, your PSC is responsible for making the IR35 determination. However, under the new rules:
• the responsibility for assessing IR35 status moves from the PSC to the end user client;
• When the engagement is inside IR35 the responsibility for making tax and national insurance deductions moves from the PSC to the fee-payer (i.e. the party next to the PSC in the supply chain – usual an agency
What does this mean for your tax status?
Agencies and clients have to know if you are genuinely running a business and will ask you questions about the ownership and management of your PSC. If you are in a current engagement, the end user client will need to assess whether the engagement falls Inside or Outside IR35. To do this they will need to take ‘reasonable care’ in making what is known as the Status Determination (SDS).
The methodology to do this will vary depending on the client but could include a questionnaire; engaging an external organisation to undertake a review or choose to use the HMRC on-line CEST (Check Employment Status for Tax). They may use a combination of the above. Some clients may also take the corporate decision not to allow contractors to work through PSC’s anymore.
Having made their SDS decision, the client then has to pass that information through the supply chain. That would normally be through the agency and to you the contractor.
What if I don’t agree with the IR35 decision?
The client has to have in place a status disagreement or appeals process. They have to respond within 45 days of receiving a query and must confirm that it has considered the representations made and give the reasons for their decision or they could give a new SDS with a different decision and state that the previous SDS is withdrawn.
Important: Even if you disagree with the client’s IR35 decision, we as your agency, cannot ignore a client’s inside IR35 determination. If we do then we become responsible for the unpaid tax and NICs.
How will my PSC be paid?
If the client decides that an engagement is inside IR35 the fee-payer (usually the agency) must (a) calculate the ‘deemed direct payment’ due to your PSC and then (b) deduct PAYE tax and NICs from the payment.
It must also pay employer’s NICs (including apprenticeship levy).
The fee-payer will not make any deductions for pensions as those remain the responsibility of your PSC. Your PSC also remains responsible for any holiday pay.
The fee-payer will need your PAYE tax code and national insurance number. If an up to date tax code is not available, emergency tax will apply.
If the client decides the engagement is outside IR35 then the fee-payer can pay the PSC gross and the PSC is responsible for managing its own tax affairs.
Can I change the way that I work?
If your engagement is inside IR35, you may decide that it is more efficient to be directly engaged by us (your agency) rather than through your PSC. In which case you would be payrolled as full PAYE including the right to holiday pay and pension auto-enrolment.
Alternatively, you may think about working through an umbrella company. We have to know that any umbrella company will deduct the correct tax and NICs and comply with all other legislation. We therefore operate a Preferred Supplier List which includes umbrella organisations who are FCSA approved.
What happens next?
Our clients and ourselves have a lot to do to implement the off-payroll rules. When a client confirms that an engagement is outside IR35, you will be given a relevant contract as soon as possible.
When the client confirms that it is inside IR35, we will need to change the contract with you.
As the off-payroll rules will apply to payments made for work done on or after 6 April 2021, any work undertaken up to that date will need to be separated from the work undertaken from the 6th. Further details on invoicing and payroll dates will be issued.