IR35 legislation is expected to impact around 170,000 individuals who work through their own personal service company (PSC), who according to the Government would be deemed employed if engaged directly.
According to the Off-Payroll Working Rules 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:
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.
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 the 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.
Visit GOV.UK website for a wealth of useful publications 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.
HMRC has provided further guidance to support organisations to comply with changes to the off-payroll working rules (IR35)
Further additional IR35 guidance for the public sector
Read our off-payroll working IR35 FAQ's article.