What is Off Payroll / IR35?
The off-payroll rules (also known as the ‘intermediaries legislation’ or IR35) are tax anti avoidance measures that form part of the Finance Act and apply to individuals who work for their own PSC (Personal Service Company). These rules require that where it is established that the individual working via the PSC would be employed were it not for the PSC or other intermediary that they work through being in place, employment taxes similar to employees should be applied.
What is Changing?
To date, the responsibility as to whether the PSC should be treated as an employee for tax and NI purposes was the primary responsibility of the PSC. The way that the PSC determined whether or not taxes should be applied historically is by assessing what has become known as their IR35 status, usually with the advice of an accountant. More can be found out about IR35 here.
From 6th April 2021 these rules have been amended for those PSCs providing services to all but small business end users/clients (see below) when it will become the responsibility of the client/user to determine whether or not employment taxes should be applied for each assignment being completed – are they inside (disguised employee) or outside (genuinely self-employed) IR35. The client will need to do this by making the IR35 assessment and advising the employment business where there is one in the chain whether or not employment taxes will have to be applied for the duration of that assignment.
This change of responsibility was rolled out in the public sector in April 2017 and it has now been legislated that the change be extended to businesses across all sectors in April 2021.
Small Business Exemption
The HRMC have given a concession to small businesses who will be exempt from this responsibility. This means that where PSCs operate to provide services to a small company the assessment responsibility still lies with the PSC and the client does not need to make an assessment.
What is a ‘small business’ for the purpose of this change? Two or more of the following criteria must be met during a 12 month period for this exemption to be in place:
Turnover of not more than £10.2 million
Balance sheet totalling not more than £5.1 million
Number of employees – no more than 50
Anti-avoidance measures preventing large companies from breaking up to become small companies will be put in place.
What does this mean to our PSC workers?
For those working via their own PSC, if the client that they are working for is not exempt as a small business, the client will be responsible for advising us, for each assignment, whether or not the worker can continue to work ‘outside IR35’ as they do at the moment – i.e. with no tax and national insurance applied, or whether they consider that they fall ‘inside IR35’. If they do fall inside IR35 they will need to be paid from 6th April 2020 with employment taxes deducted by us at source (note that this applies to payments made from 6th April onwards NOT for work carried out after 6th April).
How will the client make their assessment?
Clients are required to take reasonable measures, to make an accurate assessment and. HMRC have devised an online tool (CEST), that can be used by the client, the workers and the agency. It is likely that many assessments will be made using this tool. It is not however a requirement to use this and a client can use whatever resource they choose and can take independent advice. Using CEST and following the outcomes, however, may provide some protection should there be an investigation at a later date.
I am currently engaged via a PSC - What happens next?
HSQ Recruitment is already consulting with our clients with whom we currently place contractors and we are ensuring that they are aware of the change. We will be working with them to first determine whether the small business exemption applies to them and whether it will continue to apply post 6th April 2021. If it does, then these new rules will not apply to assignments being carried out with them and they can continue as normal.
If the rules do apply we are asking them to start to think about how they will make their assessment and assisting them to run through current scenarios in a bid to understand if the PSC is likely to be impacted. Although the actual deadline is 6th April, we will be encouraging our clients to work with us to have assessments by 28th February to ensure clarity.