This guide provides an overview to rules on off-payroll working. Further information can be found on the Gov.UK website.
It is more important than ever to get educated on IR35 now, with the newly implemented changes. More than a third of self-employed workers were unaware of the changes and how they would be impacted, so here’s more guidance.
What does IR35 or off-payroll working mean?
Off-payroll working is a term from HMRC, to define situations where individuals provide personal services, via a personal service company, to an end client. Workers in this cohort are outside of the employed and self-employed categories; off-payroll workers are not on the PAYE payroll.
IR35 regards the tax rules that ensures contractors working for companies, as well as the companies themselves are paying the correct tax amounts i.e. Income Tax and National Insurance contributions.
It was introduced as HMRC believed many thousands of people employed via a Personal Services Company (PSC) or other intermediary were not paying the right amount of tax; they should really be paying the same amount as fully employed workers, rather than self-employed workers.
When do off-payroll working rules apply?
Such rules apply if a worker provides services to the client via their own limited company or another type of intermediary (a partnership, PSC, or an individual). Basically, if the worker provided and contracted services directly, rather than through an intermediary, they would be classed as an employee.
Note: In this explanation, a worker is also known as a contractor and the client, also known as the hirer or engager, is the organisation that receives the service from the contractor/worker. A contract regards a written, verbal, or implied agreement between parties.
How to check your eligibility?
Ultimately, it is up to the client to determine if these rules apply.
There are three tests for checking eligibility:
- Who has control over how the work is completed? If the company tends to dictate the working hours and location of work, IR35 may be applicable
- Do you personally have to complete the work you do? Is there a substitute clause in your contract which you are in charge of?
- Is there a mutuality of obligations? To be IR35 eligible, it is likely that the company is obliged to give the worker more work once they have finished a task
There is a useful ‘employment status for tax’ checker on the Gov.UK website.
Who do these rules apply to?
Those who are affected include:
- Workers who provide their services via their intermediary; up to 170,000 individuals fit here, and are likely to be affected by the rollout of IR35 in the private sector
- Clients who receive services from workers via their intermediary; up to 60,000 medium and large private-sector organisations which hire workers via a PSC are likely to be affected by the rollout of IR35 in the private sector
- Agencies who provide workers’ services via their intermediary; of which around 20,000 will be affected from the rollout of IR35 in the private sector
A flowchart here helps distinguish eligibility.
The government says that genuine freelancers and self-employed workers will not be affected.
What happens if the rules apply?
If the rules apply, Income Tax and employee/er National Insurance contributions (and the Apprenticeship Levy) must be deducted from fees and paid to HMRC.
When these rules fit, it is likely you will pay 25% more tax per year.
Changes: 6th April 2021
When being self-employed, National Insurance contributions and Income Tax are not required. Some self-employed workers operate under their own limited company so take advantage of this and would rather top up their salary with dividends which are taxed at a lower rate. This is legal so long that the worker does not fall within IR35 rules.
Changes were made to the rules. The changes had been made before to the public sector and now it is time for the same in the private sector. The rules only apply to services on or after 6 April 2021. There will also be a light touch approach to enforcement for the first year with HMRC told not to penalise anyone for inaccuracies on the new rules but only those deliberately failing to comply. The Government will also place a legal obligation on client, meaning they must respond to requests for information about their size from agencies and workers to they can gather the correct details to see if they are dealing with a medium or large-sized organisation.
Prior to this date:
- For workers with clients in the public sector it is their responsibility to decide your employment status.
- For workers with clients in the private sector it is your intermediary’s responsibility to decide the employment status for each contract.
As of April 6th 2021:
- All public sector authorities and medium and large size businesses from the private sector have the responsibility to decide if the rules apply.
- For workers providing services to small clients from the private sector, the workers intermediary remains responsible for deciding if the rules apply.
- All public sector employers and those of medium/large size companies in the private sector, must provide a ‘status determination statement’ to the contractor and any other parties involved so the information can also be shared with the fee-payer
What happens if you misclassify IR35?
If your worker is classified incorrectly severe consequences can arise. There may be income losses, financial effects and even court cases.
Having a status determination statement helps reduce misclassifications. The statement includes the status decision reached, following due care and consideration, as well as the reasoning behind it.
Being a contracting company director, it is likely employment may have changed due to the new rules. What will you do with the company, especially if it has creditors which cannot be paid? Is your limited company no longer needed? Do you need help closing it?
With so many questions and perhaps more incomplete answers, why not take some FREE advice from us? We can help you close the company properly and efficiently with thanks to our many years of experience. Call us free today for more advice on 0800 9700539 or you can talk with an advisor through our website chat function.