IR35 (Off-Payroll) Guidance
If you are a subcontractor or an recruitment agency it’s very likely you’ve heard of IR35, and if you haven’t yet it’s almost a certainty that you will in the very near future.
So what is IR35?
Very simply, IR35 is a piece of legislation designed to eliminate the avoidance of tax and National Insurance Contributions through the use of Intermediaries, such as Personal Service Companies or Partnerships, in circumstances where an individual worker would otherwise, for tax purposes, be regarded as an employee of the client.
Below are some key terms, followed by an in depth guide covering everything you need to know about IR35!
- Off-payroll – this is simply another term for IR35
- Worker – the actual individual providing the services
- Intermediary – an intermediary will normally be a worker’s personal service company, but could also be a partnership, a managed service company, or another person
- Fee-payer – The party immediately above the worker’s intermediary. This party is known as the fee-payer or deemed employer. If the rules apply, the fee-payer is then responsible for deducting the tax and National Insurance contributions and paying these to HMRC.
- Client – the company receiving the actual services of the worker
- Deemed direct payment – the deemed direct payment is the amount paid to the worker’s intermediary that should be treated as earnings for the purposes of the off-payroll rules.
- Status Determination Statement (SDS) – the end client must provide produce an SDS. This is a written determination which provides a conclusion as to whether IR35 applies to the engagement and must provide the reasoning
- CEST (Check Employment Status for Tax) – the only decision making tool HMRC will stand by, assuming answers provide a true reflection of the working practices HMRC will accept the client falls outside of IR35 and stand by the decision. Alternatively HMRC have specified that if the CEST tool results in a caught by IR35 decision there is currently no formal appeals process. The CEST tool is not compulsory and end clients can make an IR35 assessment without it should they wish, although this is not advisable.
The client will need to pass the worker’s employment status determination to the agency or other organisation they contract with. The determination should continue to be passed on, until it reaches the party immediately above the worker’s intermediary. This party is known as the fee-payer or deemed employer. If the rules apply, the fee-payer is then responsible for deducting the tax and National Insurance contributions and paying these to HMRC.
If a party in the labour supply chain receives the employment status determination, but does not pass it on, they will become:
- the fee-payer
- responsible for deducting the tax and National Insurance contributions and paying these to HMRC
- This will remain until the determination is passed on
Checking who the Fee-payer is:
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 a fee-payer, you must:
- be resident in the UK, or have a place of business in the UK
- pay an intermediary that is controlled by the worker or associate of the worker
As the fee-payer you should be 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.
When you receive the worker’s employment status determination and the off-payroll working rules apply, 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. The new rules apply to any payments made to the worker’s intermediary on or after 6 April 2020. This is the case even if the work was done before 6 April 2020.
- You are a client if you receive services from a worker who:
- provides services to you through their own intermediary – most commonly a limited company that they control
- would have been an employee if they were providing their services directly to you, the client
- From April 2020, all public authorities and medium and large sized clients will be responsible for deciding the employment status of workers, it’s currently the responsibility of the workers intermediary
- Some rules already apply to all public sector clients, but from 6 April 2020 medium and large-sized private sector clients also need to apply them. The private sector includes third sector organisations, such as some charities.
- The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
- 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
- The client will need to decide the employment status of a worker, you must do this for every contract you agree with an agency or worker. You’ll need to:
- pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
- make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from your determination
- If you are also the fee-payer and the off-payroll working rules apply, you will need to deduct and pay tax and National Insurance contributions to HMRC.
- Small-sized clients in the private sector will not have to decide the employment status of their workers. This will remain the responsibility of the worker’s intermediary.
What to do if a worker or deemed employer disagrees with your determination
- A worker or the agency paying the worker’s intermediary may disagree with the employment status determination you reached.
- If this happens you will need to:
- consider the reasons for disagreeing given to you by the worker or agency paying their intermediary
- decide whether to maintain the determination if you feel it is correct and give reasons why – or provide a new the determination because you feel it was wrong
- keep a record of your determinations and the reasons for them, as well as records of representations made to you
- You must provide a response within 45 days of receiving notification that the worker or agency disagrees with your employment status determination. During this time you should continue to apply the rules in line with your original determination.
- Tell the worker if the determination has not changed.
- Tell the fee-payer and the worker if the determination has changed.
- Failure to respond within 45 days will result in the worker’s tax and National Insurance contributions becoming your responsibility.
Calculating deemed direct payments
The deemed direct payment is the amount paid to the worker’s intermediary that should be treated as earnings for the purposes of the off-payroll rules:
- Work out the value of the payment to the worker’s intermediary, having deducted any VAT.
- Deduct the direct costs of materials that have, or will be, used in providing their services.
- Deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
- The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.
You then need to deduct tax and employee National Insurance contributions as appropriate from the deemed direct payment. You also need to pay employer National Insurance contributions.
You’ll need to report the pay and deductions you make to HMRC using a Full Payment Submission, as you do for workers on your payroll. You should indicate that this person is an off-payroll worker.
You do not have to add these workers to your existing payroll, but you can do this if you wish. If the payments are not reported under your existing PAYE scheme, then you’ll have to open a new one.
You should keep records of any payments as well as amounts of Income Tax and National Insurance contributions deducted.
What you are not responsible for:
Student loan repayments, holiday pay, statutory payments and auto-enrolment
You are not responsible for deducting student loan repayments for workers engaged through their own companies. The worker will account for student loan obligations in their own tax return.
As the worker is not one of your employees they are not entitled to:
- statutory payments
- be automatically enrolled into a pension
The worker’s entitlement to statutory payments comes through their employment with their intermediary. They can also contribute to a pension as an employee of their intermediary.
Workers providing services through intermediaries are also not entitled to employment rights, such as holiday pay.
What does off-payroll mean for agencies
The changes affect you if you’re an agency and you supply workers to:
- any public sector client
- medium and large-sized private sector clients
- another agency who supplies a worker for public sector clients or medium and large-sized private sector clients
From 6 April 2020, medium and large-sized private sector clients receiving services from a worker will be responsible for:
- making an employment status determination to decide if the rules apply
- telling the worker, and agency or other labour provider they contract with of their determination, with reasons for making the determination
All public sector clients will remain responsible for deciding if the rules apply. They will become responsible for telling the worker and the agency or other labour provider they contract with of their determination. They must also give the reasons for making the determination.
The changes mean you as an agency could become liable for paying tax and National Insurance contributions if any of the following apply:
- you’re the fee-payer
- you’re not the fee-payer but do not pass on the client’s determination to the person or organisation you contract with
- you’re the first agency in the labour supply chain
If you are the first agency in the labour supply chain you must carefully consider who you enter into contractual arrangements with to provide labour.
The liability may transfer back to you, if HMRC cannot collect any outstanding tax or National
Insurance contributions from parties below you in the chain, for example, the fee-payer.