HMRC’s off-payroll working rules, historically known as ‘IR35’, were first introduced over 20 years ago and were designed to ensure that workers providing services to a client through an intermediary, such as a personal service company, and who would have been an employee if they were contracted directly, pay broadly the same tax and National Insurance contributions (NICs) as employees.
These rules changed significantly from 6 April 2021 and have seen responsibility for determining workers’ employment status shifting from the intermediary to the end client in many circumstances.
Who is affected?
You may be affected by the change in rules if you are:
a worker who provides your services through your intermediary;
a client who receives services from a worker through their intermediary; or
an agency providing workers’ services through their intermediary.
Under the existing IR35 regime, where a worker has provided services through an intermediary to a client in the private sector, it has historically been the responsibility of the worker’s own intermediary to decide the worker’s employment status and whether the rules apply for each contract.
Where the rules applied, the worker’s intermediary was required to calculate a deemed employment payment at the year end, on which tax and NICs were calculated and reported through Real Time Information (RTI) at the end of the tax year.
From 6 April 2021, medium and large clients in the private sector (including third sector organisations) have been brought in line with public sector authorities and are now responsible for deciding whether the rules apply to a particular contract and to notify the worker of the decision.
Where the rules apply, clients will now need to decide the employment status of a worker and pass its determination and the reasons for the determination to the worker or agency it is contracting with. This must be done for every contract agreed, and reasonable care must be taken when making the determination.
The party that pays the worker’s intermediary in any arrangements within the scope of the new rules, (this may be the client themselves or an agency), will usually be known as the fee-payer or deemed employer, and will be responsible for calculating and deducting employment taxes and NICs from the payment to the worker’s intermediary, paying employers’ NICs, applying the apprenticeship levy, and reporting to HMRC via RTI.
Workers operating through intermediaries and providing services to small private sector clients will continue under the existing regime for those contracts i.e. responsibility for determining whether the rules apply will sit with the worker’s intermediary.
The off-payroll working rules are complicated and can have practical implications for many areas of your business. It is extremely important that businesses engaging with contractors, and workers operating through their own personal service companies, understand their obligations under the new regime and that procedures are put in place to ensure compliance with the requirements.