The new Off-Payroll Working Rules were set to be introduced from 6 April 2020, but have now been delayed to 2021. These follow the rules that were introduced for the public sector in 6 April 2017. The public sector rules can be found here.
What is the major difference to the new Rules?
The old rules placed the onus on the contractor on deciding on their status. This led to many contracting businesses not applying the IR35 rules, where they perhaps should have been.
Now it will be the fee paying business (providing they are deemed to be a medium or large employer) that will decide whether the contractor is caught by the rules.
HMRC have published various links regarding IR35, which can be found here.
What is a Medium or Large fee paying business?
Simplistically these rules found here will apply to any business that engages the services of contractors in both the public sector and private sector which meet 2 or more of the following conditions:
- annual turnover of more than £10.2 million
- balance sheet total of more than £5.1 million
- more than 50 employees
Balance sheet total means the total amounts shown as assets in the company’s balance sheet before deducting any liabilities.
If you contract for a small business then the previous IR35 rules remain in force.
Which type of contractors are caught?
The off-payroll working rules:
- apply if a worker provides services to a client through an intermediary, but would be classed as an employee if they were contracted directly
- make sure that workers pay broadly the same tax and National Insurance contributions as an employee
An intermediary will normally be a worker’s personal service company, but could also be a partnership, a managed service company or an individual.
How do you work out if you are caught?
HMRC have produced a tool called Check Employment Status Tool (CEST) this helps to determine your status.
What happens if you are caught?
If you are caught by the new off-payroll working rules, HMRC have produced this guidance, which explains various matters.
We have examples and other links further down this article.
Should you worry about the past?
The extract below is from one of the fact sheets published HMRC.
“The reform is not retrospective. As was the case in the public sector, HMRC will focus on ensuring businesses comply with the reform for new engagements, rather than focusing on historic cases. HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. Organisations’ decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.”
What does this all really mean?
What these rules do is taking away the advantage of operating through your own Limited Company. You will effectively be treated as an employee of the fee paying business but without any of the benefits like holiday pay, pensions and other benefits.
Note you can still reclaim the VAT on expenses but it is unlikely you will obtain Corporation Tax Relief as you will not have any income to off-set against these. It also means that your deemed employer has to pay Class 1 Employers National Insurance costing them an extra 13.8% National Insurance.
There is an off-payroll example here.
Below we have created an example for illustrative purposes:
| Invoice amount | 6,000.00 | ||||
| VAT | 1,200.00 | ||||
| Total of Invoice | 7,200.00 | ||||
| Fee Payer Deductions | Tax | ||||
| PAYE Tax | PA | 1,041.67 | – | ||
| BR | 3,125.00 | 625.00 | |||
| HR | 1,833.33 | 733.33 | |||
| (1,358.33) | |||||
| Class 1 NI Employees | PT | 792.00 | 405.00 | ||
| UEL | 4,167.00 | 36.66 | |||
| (441.66) | |||||
| This is paid directly to HMRC by the Fee Payer | |||||
| Amount due to Contractor | |||||
| Net | (6,000 – 1,358.33 – 441.66) | 4,200.01 | |||
| VAT | 1,200.00 | * | |||
| 5,400.01 | |||||
| * Paid to HMRC as usual on VAT Return | |||||
| Fee Payer Extra Taxation | |||||
| Class 1 NI Employers | 726.98 | ||||
The sum deducted from the fee is paid over to HMRC. The fee payer sends the relevant information to HMRC through its PAYE reporting processes. There is no requirement for the worker to be given a payslip but they will be given a P60.
The contractor will be able to withdraw the £4,200.01 without any further taxation by way of a wage or dividend as they have already suffered the tax at source.
Assistance
We have been helping our clients with these changes and how much their net pay could potentially change. There is also a downside to the fee payer who now needs to pay Class 1 Employers National Insurance of 13.8%.
If you wish to speak to a member of our team, please contact us.
This article is no substitute for professional advice and may become out of date in time.