Changing the tax and employment status of off-payroll workers

New rules concerning the tax and employment status of off-payroll workers will be introduced on 6 April 2021. The change applies to those off-payroll workers who provide personal services to clients in the private sector through an ‘intermediary’. Under the rules, commonly known as IR35, the responsibility for determining that status will pass to medium and large private sector organisations. 

The most common type of intermediary is a worker’s own ‘personal service’ company (PSC) and PSCs, but please note that an intermediary can also be an individual, partnership or unincorporated association.

Determining employment status

How employment status is determined revolves around whether the off-payroll worker would be an employee if any intervening entities, like the PSC, did not exist so they were engaged directly by the client. However, the factors to weigh up are frequently complex. HMRC’s online status checker tool (CEST) can be used to make a determination but has come in for criticism in the past.

CEST has been refreshed to support the new regime. Despite this, many commentators remain sceptical about its efficacy in determining status in all cases.

HMRC has pledged to stand by the results produced if CEST is ‘used in accordance with its guidance and the information entered is accurate and remains accurate’.

The Status Determination Statement (SDS)

The SDS is a new part of the status determination procedure. If an organisation decides an engagement amounts to employment, it should provide the off-payroll worker with an SDS. This sets out its employment status decision, giving the reasons underpinning it.

Reasonable care

Organisations must take ‘reasonable care’ when making the status determination. In practice, this means intermediaries have the right to expect staff making the decision to be trained to know what to consider, seeking professional support if needed. They should examine each contract individually, rather than making a ‘blanket’ determination, treating all contractors the same.

HMRC advises that using CEST accurately is one example of taking reasonable care.

Off-payroll workers are entitled to disagree with an SDS, and organisations must have a process in place to deal with this.

However, if an off-payroll worker now falls within the rules for the first time, HMRC has undertaken not to use this information to review their status for previous tax years. This is subject to there being no reason to suspect fraud or criminal behaviour.

Tax matters

Where a medium or large client decides a contract is within scope of the rules, it will then:

  • calculate a ‘deemed direct payment’, based on the fees charged by the PSC
  • deduct PAYE and employee national insurance contributions (NICs) from fees, reporting and paying these to HMR
  • pay employer NICs based on the deemed payment.

This effectively means the end of the tax advantage of receiving income via a PSC, with its traditional profit extraction strategy of low salary plus dividend payments. If a contract falls within the rules then the intermediary will essentially be treated as an employee of the party paying the PSC for tax purposes.

Next steps

Steps intermediaries can take include checking the size of the clients they work for to see if the changes will apply and using CEST now to examine any contract running beyond 6 April 2021. It may also be possible to renegotiate fees where an engagement now falls within the rules. 

In some cases it will be worth considering whether operating via a PSC is still optimal for the long term. Please do contact us to discuss the impact of the new legislation on your business.