Get ready for the “off-payroll” IR35 working rules
Large or medium-sized organisations that are paying workers via personal service companies (PSC) or agencies will need to operate new off-payroll IR35 procedures from 6 April 2021.
The new rules will apply to partnerships, LLPs and larger charities as well as limited companies. Organisations that are classed as “small” under the Companies Act criteria fall outside the new rules.
From 6 April 2021, the end-user organisation will be required to determine whether the worker would be an employee of the organisation if directly engaged. That determination will need to be communicated to the worker and the agency supplying the worker, if required. This is referred to as a Status Determination Statement. The determination notifies the fee-payer that income tax and national insurance are to be deducted from payments to the PSC.
HMRC recommend that the end user organisation should use the Check Employment Status for Tax (CEST) software on the HMRC website to carry out the determination.
What if the worker disagrees?
If a worker disagrees with the employment status determination, they should contact the end user straight away to set out their grounds for disagreement.
The end user must provide a response within 45 days of receiving the disagreement. During this time, tax should continue to be deducted in line with the original determination.
Would the worker be better off as an employee?
The new “off-payroll” working rules conclude that a worker pays the same amount of tax and NI as if they were an employee. However, they will not have the same employment rights.
Where possible, the worker should consider renegotiating a higher rate of pay to compensate them for the additional tax and national insurance deducted. They may also need to consider what they do with their PSC going forward.
End users can be liable for the tax not deducted
If an agency or fee payer lower down the labour supply chain fails to deduct tax from payments to the worker’s company, the liability passes up the supply chain such that the end-user may be liable. HMRC has allegedly been defrauded by some structures set up by employment agencies, which is why this structure is in place.
Workers need to be aware of a number of schemes under investigation by HMRC.
End users should carry out due diligence and consider the wording of contracts with agencies supplying workers via PSCs.
New rules do not apply to ‘small’ organisations
The new “off-payroll” IR35 rules do not apply where the end-user organization is ‘small’ under the Companies Act rules. Thus, the current IR35 rules will apply, with the onus on the worker’s PSC to determine workers would have been an employee.