December 8, 2020

Changes to Off Payroll Working Rules (IR35) from 6th April 2021.

David Dixey, specialist employment lawyer discusses the forthcoming changes to off payroll working rules.

Our article in March 2020, just prior to the first Coronavirus lockdown, addressed the then imminent (April 20) proposed changes to IR35 and off payroll working rules, affecting the tax treatment of off-payroll workers providing services to medium and large sized clients in the private sector. However, in response to the COVID-19 pandemic the Government announced a postponement of this extension of the legislation until April 2021.    

Businesses that regularly use contractors working through a Personal Service Company (PSC) intermediary should be familiar with IR35 legislation, that permits HMRC to tax contractors who provide their services through such an arrangement as if they were in effect employees of the end client. Under original IR35 rules, and prior to earlier changes relating to engagements with the public sector, the onus was on the PSC (in most cases controlled by the worker who personally performed the services) to determine tax status and make the appropriate payments of tax and NI to HMRC. If, but for the PSC, the worker would likely have been classed as an employee of the end client (due to the nature and conditions of the work undertaken), then the PSC was obligated to deduct and pay tax accordingly, ie, at “employee” rates.        

The Finance Act 2017 amended the IR35 rules in the case of public sector organisations contracting with PSCs, placing the onus on them to check the proper tax status of contractors and make appropriate PAYE deductions at source before accounting to the PSC.  

From 6th April 2021 the rule change implemented in respect of the public sector will be extended, meaning the onus for determining the tax status of contractors (and the making of appropriate payments to HMRC) will also fall to medium and large sized private sector clients, who engage the services of a worker via a PSC. Truly self-employed individuals will continue to be responsible for their own tax arrangements; the rule changes are intended to apply to contractors who, but for their PSC intermediary would, on a day to day basis, be indistinguishable from employees of the end client. Contractors who tend to work for one client, attend the same premises daily and follow the client’s rules and procedures are likely to be taxed in accordance with IR35. A worker is likely to be “deemed” an employee of the end client for tax purposes if they supply services through an intermediary that meets any of the following conditions:

  1. Is a company in which the worker has a material interest (more than 5% of the shares and 5% of the votes);
  2. Is a partnership of which the worker is a member and is entitled (either alone or with members of their family) to at least 60% of the profits;
  3. Is an individual.

The rules are not changing for those contractors providing services to small businesses, which are defined as businesses meeting two or more of the following conditions:

  1. An annual turnover of not more than £10.2million;
  2. A balance sheet total of not more than £5.1million;
  3. Not more than 50 employees.

In respect of the above, the onus will remain with the PSC to decide tax status and implement IR35 accordingly.

Businesses that are classed as “medium or large sized organisations” will need to ensure full understanding of the rule changes to avoid potential investigation by HRMC.

For specialist advice on this, or other employment law matters, please contact Holmes & Hills Solicitors.

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