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Off Payroll Working: Key Changes in April 2021
Changes to off-payroll working rules come into effect on 6 April 2021. FPM Senior Manager Ruth Emery explains how this affects companies receiving services from off-payroll workers.
Off-payroll working rules were originally supposed to change in April 2020, but the Government deferred the plans for a year because of the spread of the COVID-19 pandemic. With the new rules now coming into effect on 6 April, employers receiving services from off-payroll workers need to ensure they are ready.
What is off payroll working?
For HMRC purposes, off payroll working, also known as IR35, is where a company receives a service from an individual (such as a worker or contractor) through an intermediary (such as a limited company).
What will change when the new rules come into effect?
Up to now, where an individual worker or contractor provided services to an entity through a Personal Service Company (PSC), the individual was obliged to assess and deduct any applicable PAYE/NIC. From 6 April 2021, however, the obligation to assess and deduct PAYE/NIC transfers from the PSC to the end-user. The new rules apply where the individual worker or contractor could be deemed to have an employment relationship with the end-user were it not for the intermediary or PSC.
What businesses are affected?
Public sector entities and with medium and large private sector companies are affected by the new rules if they meet two or more of the following conditions
- annual turnover of more than £10.2 million,
- balance sheet total (ie assets before deducting liabilities) of more than £5.1 million
- more than 50 employees
Simplified test
A simplified test applies to entities with an annual turnover of more than £10.2 million that are not:
- a company
- a limited liability partnership
- an unregistered company
- an overseas company
These entities are also obliged to apply the new rules.
Small Companies
While small businesses are exempt from the new rules, they must confirm that they qualify for exemption within 45 days if requested to do so by an individual contractor or PSC.
A business is deemed to be small if, in its two most recent consecutive financial years, it satisfies two or more of the following requirements:
- It has an annual turnover not exceeding £10.2m,
- It has a balance sheet total of not more than £5.1m,
- It had an average of no more than 50 employees for the company’s financial year.
If the relevant criteria are satisfied, the small business exemption applies. This means the individual worker or intermediary must continue to assess and deduct PAYE/NIC as was the case prior to the introduction of the new rules.
In a group situation, the group as a whole must meet the criteria. This is to prevent medium or large-sized companies from establishing subsidiaries to avoid complying with IR35 rules.
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How will IR35 affect your business?
HMRC requires that you determine the employment status of each worker, even if they are provided through an agency. If you determine that IR35 applies, you must apply PAYE and NIC deductions to the payment for the worker’s services. In other words, you must treat the worker as a deemed employee for tax purposes. In addition, you must account for employers NIC and potentially the Apprenticeship Levy.
Once you have made a determination you must communicate it to the worker and/or intermediary via a Status Determination Statement (SDS) outlining your reasons for arriving at your conclusion.
If the working practices of the engagement change or you negotiate a new contract with the worker, you will need to check if the rules still apply.
What to do if a worker or intermediary disagrees with your determination.
If a worker or deemed employer disagrees with your determination, then you need to review the determination and decide whether to maintain the determination or correct it and give reasons why. You must provide a response within 45 days of receiving notification of the disagreement. A disagreement can be raised with you until the last payment for the worker’s services is made.
How to prepare for IR35
The immediate priority is to assess the potential impact of the new off payroll working rules on any contracts that run past 5 April 2021. You will need to check:
- How many PSCs you use
- Which parts of your business use them
- How they are used
- How important they are to the different parts of the business.
Now is the time to implement processes to ensure an IR35 assessment is carried out before any new contracts for workers engaged through an intermediary are entered into. You will also need to update existing contracts where necessary.
Finally, keep in mind that the changes to off payroll working rules outlined in this article could result in an increase to your organisation’s operating costs either directly or indirectly further down the supply chain so it is important to thoroughly assess the likely financial impact.
How we can help you
Our tax team have experience of both earlier IR35 reforms in the public sector and the wider PAYE and NIC compliance obligations. We will work with you to identify risks and recommend actions to mitigate them.
