After a one-year delay, new rules will apply from April 2021 around IR35 and off-payroll working when the reforms to the off-payroll working rules come into effect on 6 April 2021.
The reforms extend the rules that currently apply where services are provided through an intermediary to a public sector body, such that from 6 April 2021 they will also apply where the end client is a medium or large private sector organisation.
If you provide your services through a personal service company on or after 6 April 2021, the new rules may affect you.
Under the current rules, if you provide your services through an intermediary (such as a personal service company) to a client which is a private sector organisation, you need to consider whether the IR35 rules apply to the engagement. This will be the case if, ignoring your personal service company, the relationship between you as a worker and the client to whom you provide your services would be one of employer and employee.
If this is the case, you must comply with the IR35 rules and work out the deemed employment payment at the end of the tax year and pay tax and National Insurance contributions (NICs) (employer’s and employee’s) over to HMRC.
If, ignoring the intermediary, the relationship between you and the end client is one of genuine self-employment, the IR35 rules do not apply. Consequently, you do not have to calculate a deemed employment payment. Instead, you can extract profits from your personal service company as you choose, paying the tax and, where applicable, NICs appropriate to the extraction method chosen.
If the end client is a public sector body, the off-payroll working rules apply instead of the IR35 rules. Under these rules, it is the public sector body which is responsible for determining whether the relationship between you (the worker) and the public sector body would be one of employment if the personal service company was ignored. If it would, the fee payer (which may be the public sector body or a third party) must deduct tax and NICs from payments made to your personal service company.
However, if (looking through the personal service company) the relationship is one of self-employment, payments are made to your personal service company gross. These rules continue unchanged beyond 6 April 2021.
Extension of the off-payroll working rules from 6 April 2021
The off payroll working rules as they apply where services are provided to a public sector body through an intermediary, such as a personal service company, are extended from 6 April 2021. From that date, the off payroll working rules will apply where a worker provides their services to a medium or large private sector organisation through an intermediary (such as a personal service company).
If you supply services through a personal service company via a personal service company or similar intermediary, the rules may affect you. It is important to understand how your obligations may change as a result, and what this may mean for the tax and NICs you pay.
Is an end client ‘medium’ or ‘large’?
The change to the rules only has an impact if you are providing services to a medium or large private sector organisation. Consequently, you will need to know whether your client falls into either category.
For the purposes of the extended off-payroll working rules, an organisation is medium or large for these purposes if at least two of the following apply:
- annual turnover is more than £10.2 million;
- balance sheet total is more than £5.1 million;
- there are more than 50 employees.
A simplified turnover test applies to organisations which are not companies, such as limited liability partnerships, and to unregistered companies and overseas companies. Such organisations are within the rules if their turnover is more than £10.2 million.
You will need to check whether the end client to whom your services are supplied is a medium or large organisation (or indeed whether it is a public body). The organisation is obliged to tell you this if you ask.
Supplying services to a medium or large end client from 6 April 2021
If, on or after 6 April 2021, you supply services to a medium or large private sector organisation through a personal service company, you will no longer need to consider whether the IR35 rules apply and operate them if they do.
Instead, your end client is responsible for determining whether, if you supplied your services to them directly, you would be regarded as an employee. Your end client must provide you with a status determination, telling you whether they think (ignoring your intermediary) you would be an employee or self-employed, and why they reached the decision that they reached. This is called a ‘status determination statement’.
You should check that you agree with their determination. You can check your status (and whether the off-payroll working rules apply) using HMRC’s ‘check employment status for tax’ (CEST) tool, which can be found on the Gov.uk website.
If you do not agree with the determination reached, you should let the client know that you disagree and why. You can provide the client with a copy of the CEST decision that you obtained in support of your view. The client must consider why you disagree and re-assess their determination. They must let you know within 45 days whether, after reconsidering, their original determination stands, or issue a new determination if they have changed their mind.
It should be noted that the determination must reflect the reality of the engagement – you cannot simply agree the status between you. Further, the client must consider each engagement individually; they cannot simply apply a blanket status to all contractors without taking account of any differences in the realities of the engagements.
If the determination is that you would be an employee if you provided your services direct to the end client, rather than you having to work out the deemed payment (as is the case currently under the IR35 rules) the client (or third-party fee payer, as appropriate) must calculate the ‘deemed direct payment’ made to your personal service company. To do this, they will adjust your invoice to deduct VAT and the cost of materials. They must deduct tax and NICs from the deemed direct payment, and also pay employer’s NICs on those payments. Although you will not be an employee of the client, you will be treated like one for tax and NICs purposes. The client will need to work out what tax code to use and must report the payments and deductions to HMRC under real time information.
You will be able to continue to extract funds from your personal service company (by paying yourself a salary or declaring dividends) and you will still need to complete a self-assessment tax return. However, when working out the personal tax that you owe, you will receive a credit for the tax and NICs deducted from payments made to your personal service company.
If the status determination is that, ignoring the personal service company, the relationship between you and your end client is one of self-employment, the off payroll working rules do not apply. Your client will continue to pay your invoices gross, without deducting tax and NICs.
Supplying services to a small private sector end client
The extended off-payroll working rules do not apply to small private sector end clients. Thus, the rules are as now if you supply your services to a small private sector organisation through your personal service company beyond 6 April 2021.
As now, you will need to determine whether the nature of the engagement is such that you would be an employee of the end client if you supplied your services directly. If you would be you must (as now) operate the IR35 rules and work out the deemed employment payment on 5 April at the end of the tax year, and account for tax and NICs on that payment. If the engagement would be one of self-employment, the IR35 rules will not apply and you do not need to work out a deemed payment.