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IR35 Off Payroll Working Update

IR35 legislation overview

Who is impacted by the legislation?

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:

  1. Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly;
  2. Medium and large-sized organisations and the public sector that engage with individuals through PSCs.
  3. Recruitment agencies and other intermediaries supplying staff through PSCs.

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.

Key legislative facts

The rules apply to all those who meet two or more of the following:

  • you have an annual turnover of more than £10.2 million
  • you have a balance sheet total* of more than £5.1 million
  • you have more than 50 employees

*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:

  • a company
  • a limited liability partnership
  • an unregistered company
  • an overseas company

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.

What you need to do as a client

  • Determine the employment status of a worker and do this for every contract you agree with either an agency or a worker.
  • Pass your determination, along with your reasons for that to the worker and to the person or organisation you contract with.
  • You will need to make sure you keep accurate and detailed records of the employment status determinations along with the reasons and any fees paid.
  • You will also need to make sure you’ve got processes in place to deal with any disagreements that arise from your status determination.

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.

What is a fee-payer*?

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:

  • calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
  • deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
  • pay employer National Insurance contributions
  • report to HMRC through Real Time Information the taxes and National Insurance contributions deducted
  • apply the apprenticeship levy and make any payments necessary

Employment allowance cannot be used against payments to deemed employees

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.

Payroll process

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.

  • Workers’ should be added to payroll like any other starter would be. They should be issued a starter checklist so they can provide the deemed employer with the information they need to run payroll.
  • The declaration the worker chooses on the starter checklist will determine their tax code. Usually this will be declaration C as the worker will already have a primary employment with their intermediary. This would put them on tax code BR. 0T week 1 / month 1 would apply if the worker does not return the starter check-list.
  • HMRC can then issue another tax code if it is required.
  • Devolved powers that affect tax codes would apply as normal, for example Scottish rates of income tax.
  • When running payroll, the RTI flag should be set to show the individual is an off-payroll worker; this is important not only for HMRC to know they are this type of worker, but to ensure no student loan notice will be sent to you (as these are not deducted under off payroll working rules).
  • Benefits in kind are treated in the same way under the off-payroll working rules. So Class 1A NICs should be calculated and paid to HMRC and P11D forms completed.  
  • Deemed employees can also be taken off the payroll in the same way and given a P45.
  • Deemed employees can also be given a P60 at the end of the tax year.
  • You should apply the apprenticeship levy and make any payments necessary.

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.

Case study of worker / intermediary calculation

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.

For example:

  1. You invoice the fee-payer for £7,200 of the worker’s services provided (£6,000 fees and £1,200 VAT).
  2. From the worker’s fees of £6,000, the fee-payer deducts £1,613 (£1,200 tax at 20% basic rate and £413 employee National Insurance contributions) which it pays to HMRC.
  3. You receive a payment of £4,387 for the services plus £1,200 VAT.
  4. The fee-payer also pays employer National Insurance contributions.

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:

  • a salary through your payroll but don’t deduct tax or National Insurance contributions
  • dividends - these do not need to be recorded on your worker’s Self-Assessment

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.

Corporation Tax calculations

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.

VAT

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.

How do I make a status determination?

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.

What if the worker disagrees with your status determination?

If your worker disagrees, they’ll need to write to the client to give reasons why.

This should include details of:

  • the employment status determination they disagree with
  • their reasons for disagreeing

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.

Penalties for non-compliance

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.

Useful links

Visit GOV.UK website for a wealth of useful publications here covering all the changes to the off-payroll working rules from April 2021.

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.

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