IR35 legislation is expected to impact around 170,000 individuals who work through their own company, who according to the Government would be deemed employed if engaged directly:
IInterestingly the government believes there will be on-going savings for the PSCs as they won’t need to determine their own status going forward, but for business they think it will cost in the region of £14m.
The rules apply to all those who meet two or more of the following:
*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.
IIn addition, there is what is known as a simplified test:
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:
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. If you use the simplified test then you must start new companies applying the rules from the beginning 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 the 6th of April 2020 your circumstances may later change you will need to check whether or not the rules will now apply to you.
Those deemed small clients in the private sector will not have to decide the employment status of workers but will now need to advise the supply chain they are small and fall outside of the IR35 legislation.
If you are also the fee-payer* and these rules apply to you, you will need to make sure you deduct and pay tax and National Insurance contributions to HMRC. In addition, if you are subject to the apprenticeship levy you will need to take this deemed income into account.
According to the guidance in most cases the organisation paying a worker’s intermediary will be the fee-payer. To be a fee-payer, you must be the lowest party in the labour supply chain. This is usually the person paying the worker’s intermediary.
As the fee-payer you should have been given the worker’s employment status determination by the client or agency immediately above you in the supply chain.
If you do not receive the determination, you should pass on the payment without deducting taxes and National Insurance contributions. Before you do this, you may want to ask the client or agency immediately above you in the labour supply chain to find out why you haven’t received a status determination.
If you are required to process the worker’s payment through the payroll you must:
HMRC has also reiterated its previous announcement that the rules will only be applicable to services carried out from 6 April 2021, and not to any payments made on or after 6 April 2021. Therefore, if, for example, services were provided on 30 March 2021 but not paid until 8 April 2021, IR35 rules would not apply. If the services were provided on 8 April 2021, then the new rules would apply.
If you are the deemed employer/fee-payer and need to operate the rules as above there are some key considerations for payroll as follows. If you are an Armstrong Watson payroll client, this will be taken care of for you.
As stated above, Employment Allowance cannot be used against payments to deemed employees and the secondary NICs relating to off-payroll workers doesn’t apply towards the Employment Allowance limit.
An example of a simple payroll calculation; if you are the worker and paid through the intermediary will be as follows:
The fee-payer will pay VAT, if you’re VAT registered, and then deduct Income Tax and employee National Insurance contributions from your fee. This means the payment you receive will have had tax and National Insurance deducted.
If the off-payroll working rules apply, your income for your worker’s services will have had tax and National Insurance contributions deducted from them. This means that when you pay the worker they do not need to pay tax and National Insurance contributions again on those fees.
You can do this by either paying it as:
As the amounts have already been treated as employment income doing it this way will avoid any double payment of tax or National Insurance contributions.
Report any non-taxable payments you make to the worker using the Full Payment Submission. Your payroll software should produce this.
When you calculate your company’s taxable profit, you should deduct the VAT exclusive amount of the invoice. This is the amount from which Income Tax and National Insurance contributions were deducted at source.
Your company accounts should show this deduction to make sure the amount is not taxed twice.
If you’re VAT registered, you should continue to include VAT in your invoices. You’ll need to file your VAT returns and pay HMRC any VAT payments that are due.
There are a number of ways in which you could do this, however you will need to decide what is appropriate for your business. The one I am familiar with, albeit it isn’t perfect yet, is HMRC’s CEST tool. Should you decide you would prefer someone else to make or assist with the determination then that is your call. Here at Armstrong Watson the tax team are more than willing to help you; just ask (note charges may apply).
Once the determination is made, you must share it with all the supply chain and especially the worker. Please ensure you keep records, especially of how you reached the status determination. If using CEST and the information entered is accurate then HMRC will stand by the decision made by the tool.
If your worker disagrees, they’ll need to write to the client to give reasons why.
This should include details of:
Keep copies of any records about disagreements.
The client will then have 45 days from the date of receiving the worker’s disagreement to respond. During that time the client should continue to apply the rules in line with their original determination.
If the employment status determination has not changed, the client will have to tell the worker.
If the employment status determination has changed, the client will have to tell the worker and the fee-payer. If changed from inside IR35 and processed via the payroll, HMRC state normal correction rules apply.
It is worth bearing in mind that understanding your supply chain will be part of any Corporate Criminal Offence (CCO) process. This requires companies to have reasonable procedures in place to demonstrate a defence against the CCO legislation.
As part of HMRC’s recent announcements, probably in advance of any recommendations made by the House of Lords, HMRC confirmed that penalties will not be applied to genuine mistakes in the first 12 months. Deliberate acts will still attract penalties.
Amongst other things you will find a very useful case study along with top tips and also a decision making tool for contractors.
Further additional guidance for public sector can be found here.