On 6th April 2021 revised rules governing off-payroll workers go into effect in the UK for the private sector under the new IR35 law. What does this mean for you, as a contractor, recruitment business or organisation engaging off-payroll workers?
Let’s provide some key definitions first and then we’ll cover the why, what and how of this legislation for both clients and Personal Service Companies (PSC).
Personal Service Company
Otherwise known as a single person limited company, a Personal Service Company is a limited company which consists of one single person, Director or Partnership, with no other employees. Also defined by Companies House as “A person with significant control (PSC) is someone who owns or controls your company.”
Fee-Payer or Engager
The entity that is in receipt of the services of the off-payroll worker, is deemed the Engager. The entity responsible for paying the off-payroll worker is deemed the fee-payer. The new IR35 law applies to only medium and large organisations in the private sector who have direct links to the UK (legislation affecting the public sector went into effect in 2017). Small organisations are exempt (see criteria). It also applies to recruitment businesses which supply the end client with workers.
Why IR35?
Per HMRC, the intent behind the off-payroll working rules is to create equity between individuals – be they inside or outside of the end client’s organisation – who work in a similar way. The aim is to have all individuals and their associated employers pay broadly the same Income Tax and National Insurance contributions. This section of the law was originally due to come into effect on 6 April 2020 but was postponed due to COVID-19.
How IR35 Impacts Contractors
If you are a PSC contractor, IR35 may change how you are paid, that is, whether your Income Tax and National Insurance contribution is paid by your agency / client on a monthly basis or if you manage this directly with your annual tax return. If the former, this indicates that you are within IR35 and the way the Income Tax and NICs are calculated and paid could potentially change your retention; for example, as a contractor, you would pay National Insurance and Income Tax on the entire income for the time within IR35 assignment. If the latter, you should have received confirmation from the client that you are outside of IR35 and you continue to pay your taxes as before on your company income.
The client is now responsible for determining your IR35 status. While they may choose to consult with you in this determination, you cannot make the choice of whether you are “inside” IR35 or “outside” IR35. However, you can appeal the decision through the client’s status disagreement process. This determination is made based on the terms and conditions of a particular engagement and your actual working practices – not just what is written in your contract. The client must take due care when making the determinations and cannot make a blanket determination across all contractors. Contractors should appreciate that other clients in the market may be consistent with this status determination so simply terminating the contract doesn’t necessarily mean another client will determine differently when providing the same services.
HMRC Contractor Examples
Below is an example HMRC gives to describe a contractor who is “inside” IR35; this is not inclusive of all situations, just a possible scenario:
- works predominantly for the same client, at their premises and following their policies and procedures and using their equipment
- cannot send a substitute to work on their behalf
- would require permission to seek additional work elsewhere
In contrast, an example of a truly self-employed individual (“outside” IR35) would be someone who:
- operates their own business structure, for example, has their own business premises and insurance
- employs other workers
- works for a wide range of clients
- controls and directs their own work
- works on a project basis with payments timed to specific deliverables, using for example, a Statement of Work contract
- not obligated to accept work from the end client if they don’t want it (mutuality of obligation)
Again, these examples are not inclusive of all possible situations. But if the worker is determined as outside of IR35, the individual will continue to pay tax through Corporation Tax Self Assessment (CTSA) and Income Tax Self-Assessment (ITSA).
The HMRC provides a tool you can use to check your employment status for tax. Before completion, be sure you have the following information:
- details of the contract
- the worker’s responsibilities
- who decides what work needs doing
- who decides when, where and how the work is done
- how the worker will be paid
- if the engagement includes any corporate benefits or reimbursement for expenses
How IR35 Impacts Clients and Fee-Payers
With the new phase of IR35, clients are responsible for making status determinations for PSC contractors and the fee-payers now have the responsibility of paying taxes directly to HMRC on behalf of affected contractors. If the client makes an incorrect status determination or ignores their responsibilities all together, there could be penalties. Fee-payers are whomever is directly paying the worker – this could be an intermediary like a recruiting business or the actual client if they are paying the contracted workers directly.
Also, regardless of where the company is geographically based, clients must abide by IR35 if they cannot establish themselves as “wholly overseas.” If a client is based outside of the UK but has links to the UK, for example in the form of a UK branch or subsidiary, they must comply with IR35 regardless of the location of main headquarters. So, for instance, a US-based company with UK offices must follow these rules and may consider bringing in a UK agency to satisfy the fee-payer element to ease the administrative burdens.
The first step for the client is to determine the status of each contractor, taking “reasonable care” in making the determination and informing the contractor of that status and their reasons. Reasonable care implies that the individuals that make the status determination are trained and understand the rules. In this process, the client must:
- establish a robust process / audit trail internally
- not make blanket decisions (i.e., classifying all contractors the same), although role-based decisions are acceptable
- confer with the contractor’s line manager and the contractor to assess
- consider timing of the determination – at vacancy, pre-start date or during assignment
- establish a status disagreement process
- revisit the determination periodically (e.g., at contract renewal, every six months, etc.)
HMRC Client and Fee-Payer Examples
The same tool that the HMRC provides for contractors to check their employment status is also very useful for fee-payers. Before using the Check Employment Status Tool (CEST), make sure there is a contract in place to determine if the engagement is classed as employment or self-employment. Before completion, be sure you have the following information:
- details of the contract
- the worker’s responsibilities
- who decides what work needs doing
- who decides when, where and how the work is done
- how the worker will be paid
- if the engagement includes any corporate benefits or reimbursement for expenses
Upon receipt of status determinations, the fee-payer must treat the contractor income in line with their confirmed IR35 status. If deemed inside of IR35, the following PAYE calculations must be accounted for:
- Employers National Insurance
- Apprenticeship Levy
- Employees National Insurance
- PAYE Tax
Deductions must be accounted for before paying contractors and taxes should be paid to HMRC on a monthly basis, reported via Real Time Information (RTI) submissions.
Resources
Planet Pharma has a dedicated UK team with extensive knowledge in IR35 regulations who can support you in these new legal obligations. Learn about our approach to IR35 Preparedness here.
The HMRC provides guidance on their website about fee-payer responsibilities under the off-payroll working rules.
Additionally, these HMRC resources may be helpful:
- Off-payroll working (IR35): detailed information
- Help and support for off-payroll working (guidance, webinars and other support)
- Important facts for contractors – off-payroll working rules (IR35)
- Fee-payer responsibilities under the off-payroll working rules
- Rules for off-payroll working from April 2020
- April 2021 changes to off-payroll working for clients
- Changes to the Off-Payroll Working rules (IR35): Education and support available to customers
Photo credit: Canva
by Jess Shaw, Director of UK Operations for The Planet Group, and Rowena Horn, Associate Director of Recruitment (EMEA) for Planet Pharma
