Most readers will be aware that the rules for off payroll working, commonly referred to as ‘IR35’, were extended by HM Revenue & Customs (HMRC) to include the private sector for all except small businesses with effect from 6 April 2021. For those who may have overlooked the extension of the rules, this week’s Muras Matters provides a general reminder.
The changes target individuals who provide their services to a client via an ‘intermediary’, such as a personal service company, and consequently pay less tax and NI than if they were employed by the client.
Very broadly, in these circumstances, the end user must assess if the individual would be an employee if they were engaged directly and, if so, the entity paying the personal service company becomes responsible for deducting tax and NIC on payments made in respect of the services provided.
The changes affect situations where the end user:
- is in the private sector;
- is a large or medium sized business; and
- engages an individual supplied via an intermediary such as a personal service company.
If the end user is a small business then they are not affected by the rules and the responsibility for IR35 remains with the personal service company. A small business is classified as one which satisfies two out of the following criteria:
i) Turnover of £10.2 million or less
ii) Balance sheet total of £5.1 million or less
iii) Less than 50 employees.
It is the responsibility of the end user to determine whether the worker would be regarded as an employee or as self-employed if they had been engaged directly.
In order to establish this the various employment status tests will need to be applied to the work being carried out by the individual. It is important that the status is assessed carefully as it is the responsibility of the end user. There are a number of indicators of employment/self-employment which should be considered however it is important to note that there is no one over-riding test but rather, status should be considered ‘in the round’.
HMRC also offer an online system called the “Check Employment Status for Tax” (CEST) tool to assist with the decision. HMRC have said that they will stand by the result given by the tool unless the information input is incorrect.
Once the status of the worker has been determined then the end user must notify their personal service company of the decision. The notification is called the Status Determination Statement (SDS). This must be done by the later of the date the contract is entered into or the date services start to be performed.
For the SDS to be valid it must:
- State whether or not the worker would be an employee if engaged directly
- Provide the reasons
- Be determined with reasonable care.
The output from CEST can be used as a valid SDS.
The worker can ask for an explanation of the decision which must be provided within 31 days.
If there is a fundamental disagreement between the parties there is a process to deal with this.
Deducting tax and national insurance
Once it is determined that IR35 status applies it is the end users responsibility for communicating this down the chain of engagement. Where the chain includes other entities in addition to the worker and their personal company, for example a recruitment agency, then they must be notified too.
It is important to note that it is the entity which pays the worker’s personal service company which is responsible for deducting and accounting to HMRC for any tax and NIC due. This entity is known as the fee payer.
Responsibilities as a fee payer
The fee payer must deduct tax and NIC and report the payment to HMRC via their PAYE scheme.
In order to do this they must first establish the ‘deemed payment’ which is the amount which will be treated as earnings. This is calculated as follows:
- Work out the value of payment made to the personal service company net of VAT
- Deduct the cost of materials used
- Deduct any expenses that would be deductible for tax if the worker was an employee
- The result is the deemed payment.
As has been seen in the public sector since the rules were introduced in April 2017, the changes will impact both the individuals providing the service as well as the business contracting with them. Therefore, it is important that all parties consider the likely impact such arrangements may have on their own business.
The application of IR35 remains a complex area and if you would like more information on how the legislation applies, or how the new rules may affect you, please contact our Tax Director, Jenny Marks.
Our Current working arrangement – We remain ‘Open for business’
Our staff have returned to office based working on a rota basis, each attending two days a week, whilst continuing to work from home at other times. They can still be contacted in the usual way either via email or by calling the office number where reception will divert your call to the appropriate staff member.
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