IR35 – Changes to off payroll working in the private sector

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New tax rules for individuals working via their own companies for a medium or large business

From 6 April 2021, new tax rules are introduced for individuals who provide their personal services via an ‘intermediary’ to a medium or large business. An intermediary may be another individual, a partnership, an unincorporated association or a company. The most common structure is a worker providing their services via their own company (PSC), which is the term used in this letter to summarise the rules which will apply to all intermediaries.

Similar rules were introduced in 2017 for public sector organisations receiving services from PSCs.

The effect of the new rules, if they apply to you, will mean:

  • the medium or large business (or an agency paying the PSC) will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual;
  • generally, the entity that pays the PSC for the services must first deduct PAYE and employee National Insurance contributions (NICs) as if the deemed payment is a salary paid to an employee;
  • the paying entity will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment but also employer NICs on the deemed payment; and
  • the net amount received by the PSC can be passed on to the individual without paying any further PAYE and NICs.

The practical effect of these rules is that you will no longer benefit from the potential tax advantages of receiving such income via your own company.

There may also be pressure from businesses to renegotiate contracts due to their increased cost of employer NICs.

The new tax rules apply to amounts paid from 6 April 2021 and so may affect current contracts.

What is a medium or large business?

The legislation uses an existing statutory definition within the Companies Act of a ‘small company’ to exempt small businesses from the new rules. Therefore the rules will exempt businesses meeting any two of these criteria: a turnover of £10.2 million or less; having £5.1 million on the balance sheet or less; having 50 or fewer employees. If the business receiving the work of the individual is not a company, it is only the turnover test that will apply.

The business must respond within 45 days if you ask for information on size. It is important to be clear on the size of the business to whom you are providing your services at the outset, so you know who is responsible for making the status decision and paying tax, and where liability lies if there is an error.

There is no change if you provide services to a small business. Even after the changes are introduced from 6 April 2021, you remain responsible for deciding if IR35 rules apply to contracts you have in such cases.

Who will decide if the rules apply?

The medium or large business will decide. The business needs to form an opinion as to whether, if the personal services of the individual were provided under a contract directly between the individual and themselves, the individual would be regarded as an employee of the business. This is the same kind of employment status test based on case law that businesses and agencies have to consider when they hire staff directly.

It is a matter of judgement whether the nature of and manner in which the services provided point to employment or self-employment. HMRC has a Check Employment Status Service tool (CEST) to help businesses decide the status of individuals providing personal services to them.

The link to the Employment Status Service tool is www.gov.uk/guidance/check-employment-status-for-tax.

The Status Determination Statement (SDS)

The SDS is a new part of the status determination procedure. If the business to whom you are providing services decides your engagement amounts to employment, it should provide you with an SDS, setting out its employment status decision, and giving the reasons underpinning it.

If you are part of a longer labour supply chain, the business should also pass the SDS information to the next entity it deals with, and so on, so that the information flows along the chain as required. There is no hard and fast rule about how the SDS is issued, but it should be in a format that you can ‘receive or access’.

What can you do if you disagree with the business deducting PAYE and NICs?

The business must take ‘reasonable care’ in coming to its conclusion. If it doesn’t, the statement is not a valid SDS. HMRC guidance states: ‘What is necessary for each client to discharge that responsibility must be viewed in the light of their abilities, experience and circumstances.’ More will be expected of a large multi-national company, for example, than a smaller business.

If you disagree with the decision you can use the tool to see if you obtain a different conclusion. If you obtain a result which confirms self-employment you can discuss the results with the business or you can contact us to discuss the matter. Even if you obtain an employment result, this does not necessarily mean the result is correct. CEST has come in for criticism over the years, and has been refreshed to support the new regime.

HMRC has been working with stakeholders to enhance the service and guidance on the use of CEST but many commentators consider that the law on status is too complicated for a yes/no checklist to provide the right answer in all cases.

SDS dispute process

You have a statutory right to make a representation to the medium or large business where you believe that the conclusion mentioned in the SDS is incorrect. Written disagreement is prudent: give details of the SDS you disagree with, explain why you disagree, and keep a record of proceedings. The medium or large business has 45 days, from when the representation is received, to review the decision and either confirm that the decision and explain why they have done so or alternatively, withdraw it and provide a new one, with confirmation of the date it is valid from.

What is the tax effect on you if the new rules apply?

The important point to appreciate is that you will be treated in tax terms as an employee of the entity that pays the PSC for your services. So if a contract ends during the 2021/22 tax year, the paying entity should send you a P45 showing the total deemed payment and deductions for PAYE and NICs. If the contract extends over the 2021/22 tax year, the paying entity should issue a P60 to you showing the total payment and deductions in the 2021/22 tax year.

You will need to show the amounts on the P45 or P60 as an employment on the employment pages of your 2021/22 self assessment tax return.

The amounts of income tax recorded as paid by you on the P45 or P60 may well not be the correct amount of income tax payable by you.

The other important point to appreciate is that it is your company which is receiving the amounts from the paying entity. How can you extract such income tax efficiently? The legislation has special rules to allow you to do so.

What procedures does your PSC need to follow if deemed payments are received?

The PSC will deduct the amount of the payment it receives, as well as the PAYE/employee NICs costs incurred, from its taxable income, so it will not be taxed twice.

What if your company has other contracts hiring out your personal services?

Nothing is expected to change in respect of contracts your company has with small private sector clients. The possible application of IR35 needs to be considered but there is no change in the law regarding IR35. If contracts are not caught by IR35, we will help you decide on an appropriate profit extraction strategy for the profit from these contracts.

How we can help

We can help you decide whether to discuss the operation of the legislation with the medium or large business.