First guidance on IR35 private sector off-payroll rules
23 Aug 2019
HMRC has published its first detailed guidance on how new rules for off-payroll workers (IR35) will operate in the private sector when the responsibility for determining individual’s employment status moves to employers in April next year, reports Pat Sweet
23 Aug 2019
The off-payroll working rules apply if a worker provides their services through an intermediary, but would be classed as an employee if they were contracted directly.
They have been introduced to ensure that workers providing services through an intermediary pay broadly the same tax and National Insurance contributions (NICs) as an employee.
The changes already apply in the public sector, but from 6 April 2020 they are being extended to medium or large-sized private sector clients who take on workers via intermediaries, including some charities and third sector organisations.
An intermediary will normally be a worker’s personal service company (PSC), but could also be a partnership, a managed service company, or another person.
Up until April 2020, intermediaries decide their own status for private sector engagements. From that date, it will now be the responsibility of the company for which they supply services to provide them with an employment status determination, together with the reasons for that determination.
The only exception is small companies, where the intermediary will continue to decide on employment status. Intermediaries will also need to determine whether the off-payroll working rules apply if they do not receive a status determination from the client.
Intermediaries who decide the rules apply to them will become responsible for deducting tax and National Insurance contributions (NICs) from their fees and paying these to HMRC.
The client will need to pass the worker’s employment status determination to the agency or other organisation they contract with. The determination should continue to be passed on, until it reaches the party immediately above the worker’s intermediary. This party is known as the fee-payer or deemed employer.
If the rules apply, the fee-payer is then responsible for deducting the tax and NICs and paying these to HMRC. The fee-payer is the lowest party in the labour supply chain and in most cases this will be the organisation paying a worker’s intermediary.
Fee-payers need to be resident in the UK, or have a place of business in the UK. They must not be controlled, or material interest not be held, by either a worker, alone or with one or more associates of a worker, or an associate of a worker, with or without other associates.
Once they receive the worker’s employment status determination and the off-payroll working rules apply, fee-payers are responsible for calculating the deemed direct payment to account for employment taxes and NICs associated with the contract.
Fee-payers deduct those taxes and employee NICs from the payment to a worker’s intermediary, pay employer NICs, report deductions to HMRC through real time information (RTI), and apply the apprenticeship levy and make any payments necessary. Employment allowance cannot be used against payments to deemed employees.
Deemed direct payment
The deemed direct payment is the amount paid to the worker’s intermediary that should be treated as earnings for the purposes of the off-payroll rules.
This is calculated based on the value of the payment to the worker’s intermediary, having deducted any VAT, plus the direct costs of materials that have, or will be, used in providing their services, and including expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
In more detailed advice on payments, HMRC says clients should start the deemed employment calculation by taking the income the intermediary has received (including non-cash benefits) from off-payroll engagements in the tax year.
They then apply a flat rate 5% deduction from this income for general expenses incurred in running the business. It is not necessary to demonstrate this expenditure.
If off-payroll working rules apply, each engagement will be regarded as a separate permanent employment for the purposes of travel and subsistence expenses. This means that intermediaries cannot claim expenses for travel and subsistence if they regularly commute from home to a workplace for an off-payroll engagement.
When reporting the pay and deductions, companies will need to indicate if someone is an off-payroll worker. They can be added to an existing payroll, although this is not a requirement. Any errors can be corrected via RIT in the same way as for other employees.
Deductions not included
Private sector clients are not responsible for deducting student loan repayments for workers engaged through their own companies. The worker will account for student loan obligations in their own tax return.
As the worker is an employee, they are not entitled to statutory payments, nor are they automatically enrolled into a pension. The worker’s entitlement to statutory payments comes through their employment with their intermediary. They can also contribute to a pension as an employee of their intermediary.
Workers providing services through intermediaries are also not entitled to employment rights, such as holiday pay.
If an intermediary disagrees with how a client has determined employment status, they will need to write a letter explaining why.
The client will then have 45 days from the date of receiving the worker’s disagreement to respond. During that time the client should continue to apply the rules in line with their original determination.