The off-payroll working rules, often referred to as ‘IR35’, have been in place since 2000 to create a ‘level playing field’ as between individuals who work in a similar way. They are designed to make sure that an individual who works like an employee but through their own limited company – generally known as a Personal Service Company (PSC) – pays broadly the same Income Tax and National Insurance Contributions (NICs) as other employees.
However, where previously determination as to whether the rules applied rested with the PSC, this has now changed.
In April 2017, the government reformed the rules so that public sector client organisations who take on contractors are responsible for deciding as to whether in fact the contractor provided by a PSC should be taxed at source on payments received. This has proved to be effective in collecting significantly more tax.
New rules coming into effect from 1 April 2021 will now extend to engagements with medium or large-sized client organisations in the private and voluntary sectors. It will shift responsibility for operating the off-payroll working rules from the individual’s PSC, to the client organisation or business to which the individual is supplying their services. This includes responsibility for deciding whether the rules should apply and ensuring that the associated employment taxes and NICs are deducted, where appropriate.
Although public sector client organisations are already responsible for deciding whether the rules apply, they will be affected by some new requirements, such as issuing a Status Determination Statement to the contractor in question, which should include the reasons for the status decision.
Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses. Broadly, small organisations are those satisfying two or more of the following requirements:
- annual turnover not exceeding £10.2 milion
- balance sheet total not more than £5.1 million
- average of no more than 50 employees for the company’s financial year
To determine whether the small business exemption applies to a tax year, these requirements are applied to two consecutive financial years: the latest financial year where the filing date for the accounts ends before the beginning of the tax year and the financial year before that one.
Currently there is a 5% allowance available to PSCs to reflect the costs of administering the off-payroll working rules. Responsibility is shifting from the PSC to the organisation receiving the individual’s services, so this allowance will be removed from 6 April 2021 for those engagements with medium and large-sized organisations in the private and voluntary sectors. The allowance will continue to be available to PSCs for engagements with small organisations outside the public sector.
The legislation also contains provision to allow for the transfer of liability and the passing of information through labour supply chains will also be included.
Businesses should consider whether these new rules will apply to their engagements from 1 April and take appropriate action including contacting their advisers for assistance on status determinations if relevant.