IR35 & Off PayrollApril 2021
From 6 April 2021, the way that businesses engage with individuals who provide their services through a personal service company will change. If affected, you will need to review your position and we can help guide you through this process. Simply select the relevant tab to find out more.
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YOUR PERSONAL SERVICE COMPANY - APRIL 2021
From 6 April 2021, the way that medium or large sized businesses (as defined for audit purposes), engage with individuals who provide their services through their own personal service company (PSC) is changing.
If your PSC is engaged by a medium or large sized business, the obligation to assess whether your PSC is inside or outside of IR35 will move to the end-client.
If your PSC is engaged by a small business, the current IR35 regulations remain the same and obligations remain with your PSC.
A small business satisfies two or more of the following requirements:
|1||Annual Turnover||Not more than £10.2m|
|2||Balance sheet total||Not more than £5.1m|
|3||Number of employees||Not more than 50|
Under the new rules, the end client will have the obligation to make the IR35 assessment and then ensure that the assessment is provided to the contractor. The end client will also be required, upon request, to provide the reasons for the assessment.
The April 2021 reforms include a new client-led challenge process, applying equally to both the public and private sector. How the challenge process will work in practice is yet to be decided.
The end client has to exercise ‘reasonable care’ in making the assessment, so is not allowed to make blanket decisions.
If the end client decides that the contract is caught by IR35, then payments to the PSC will be paid after deductions for income tax and national insurance contributions (NICs). At present, there is no provision for 5% expenses and the NICs employer contribution should not be deducted from the contractor pay, although this has been happening in the public sector.
Questions to consider now are do you continue to provide your services through your limited company, or go self-employed? If you decide to close your limited company, what is the best way to close it and extract the retained profits?
OFF PAYROLL DIRECTORS
Are your directors invoicing for their services?
The default position is that all directors’ fees, whether executive directors, non-executive directors (NEDs) or de-facto directors must be paid under PAYE. HMRC do not accept directors or NEDs carrying out director duties as a self-employed individual.
Increasingly, individuals are given the title of ‘managing director’ or similar, without becoming a statutory director. The legislation states that it applies to office holders, not necessarily directors, so if the individual is carrying out the duties of an office holder PAYE will still be due.
Although a director or NED must be taxed through PAYE, unless they have a contract of employment they will not be an employee under employment law. So, although the director pays tax as an employee, they are not an employee for employment rights purposes – an important distinction between the tax and legal treatment.
Personal service companies (PSCs)
If a PSC is engaged to provide director services then the PSC currently is responsible for deducting the PAYE and NIC. However, this will not apply if the individual is the director but just invoices via a PSC. In this case the end client is liable to operate PAYE.
In a recent case, the directors of the retail company had each set up a consultancy company to provide their services to the company. The court found that the consultancy services they were providing were the duties of a director. The court found that the PSC could be disregarded because in reality it was the individual directors who were providing the services and the company should have operated PAYE.
Additional consultancy services
In some circumstances a director can provide specialist services under a separate contract which is genuinely on a self-employed basis. However, such an arrangement has to be very carefully documented and HMRC will often challenge.
The next steps
If you have identified directors who currently invoice the business, you will need to take action to correct the position:
- Individuals must be paid via PAYE
- Contracts with PSCs should be reviewed to ensure they cannot be disregarded by HMRC
- If the end client is in the public sector, they will have to make the decision whether the arrangements are inside IR35 and, if so, the public sector body will need to apply PAYE
- If the end client is within the private sector, the PSC remains liable for operating any PAYE under IR35. From April 2021, the public sector rules above will also apply to medium and large businesses in the private sector.
- If you identify any issues you should consider making a voluntary disclosure to HMRC to correct the historic positon.
The conclusion is that it is very difficult for any director to be paid other than through payroll.
SPECIALIST EMPLOYMENT STATUS TEAM
Please contact Steve Ashworth or Scott Campbell if you have any clients who may require a review in light of the above legislation.
MEDIUM AND LARGE BUSINESS AND THE OFF-PAYROLL REFORMS (IR35) – APRIL 2021
The draft legislation for the reforms to the off-payroll working rules for personal service companies (PSC) were published on 11 July 2019. These rules will apply to medium and large businesses in the private sector to bring them in line with the public sector. There is a small company exception where the current IR35 rules will remain unchanged.
For the last 20 years, responsibility for determining employment status and handling the tax liability under IR35 has been with the PSC.
The reforms mean that your business, as the end client, will determine whether the engagement is inside or outside of IR35.
Where the rules apply, the organisation who directly pays the PSC, whether that is your business, an agency or third party (referred to as the fee payer), will need to deduct tax and employees’ NICs from the PSC’s invoice and pay the employer’s NICs. There is no longer any entitlement to the 5% expenses allowance.
Who is affected?
It is important to note that the proposed reforms will only affect medium and large sized end clients (as defined for audit purposes). For small businesses the IR35 rules remain unchanged.
However, there is no small company exemption if you are an intermediary in the labour supply chain, rather than the end client.
Determination of status
The determination made by the end client will be cascaded down the labour supply chain, specifically to any intermediate agency and the off-payroll PSC.
If for some reason the information does not get through to the fee-payer or the PSC and consequently HMRC does not receive the tax due, the government proposes that the liability should initially rest with whoever made the error.
The off-payroll workers themselves will have the right to see the determination and also to challenge the determination. The fee payer (if a different entity in the supply chain) will also be able to challenge the determination if they disagree with it.
Your business will be responsible for setting up or outsourcing a challenge process based on requirements laid out in legislation.
Check employment status for tax (CEST)
HMRC’s online status tool, which HMRC suggest is used to determine employment status, will be enhanced.
How PKF Francis Clark can assist?
- Review your contractor workforce to see how many are paid off-payroll via PSCs
- Assist you with establishing your internal processes to determine whether your PSC engagements are inside or outside of IR35. Or we can undertake these reviews and provide you with a determination
- Suggest changes to your contractual engagements to reduce the number that fall within IR35
SMALL BUSINESS AND THE OFF-PAYROLL REFORMS – APRIL 2021
From 6 April 2021, the way that medium and large businesses engage with individuals who provide their services through their own personal service company (PSC) is changing. For small businesses, however, the IR35 regulations remain the same. So, the IR35 obligations will remain with the PSC at present.
Companies Act definition of ‘qualifying as small’
The qualifying conditions are the same as for the audit threshold and are met by a company in a year in which it satisfies two or more of the following requirements:
1) Annual Turnover – Not more than £10.2m
2) Balance sheet total – Not more than £5.1m
3) Number of employees – Not more than 50
For those small businesses that are about to breach the audit threshold, they will need to plan for the need to apply the new off-payroll rules.
If you are acting as an agency in a labour supply chain, the small sized exemption is not available and the new rules will apply to you.
It is advisable to communicate with any contractors or consultants now to let them know about the off-payroll reforms, especially if you are near the medium sized threshold. We have a separate information sheet for PSCs which we can send you on request.
While you remain ‘small’, you will need to let your contractors know that they are still required to operate the IR35 rules themselves.
SPECIALIST EMPLOYMENT STATUS TEAM
At PKF Francis Clark we have a specialist employment status team, who can help you with your queries on IR35 for personal service companies.