Off Payroll Working & IR35

2017 and 2021 off-payroll working rules

In 2017, the off-payroll working rules were introduced. These rules applied to public sector organisations that engaged workers through their own personal service company (PSC). In April 2021, these rules were extended to include medium and large sized businesses in the private sector.

The off-payroll working rules tried to ensure that contractors working through PSCs were legitimate off payroll workers, and not essentially working under a contract of employment. This placed additional regulations and burdens on businesses, by shifting the responsibility for assessing the employment status of workers engaged through a limited company, from the worker’s limited company to the engaging entity.

As a result, businesses (end-users) have been required to:

• Assess whether the worker would be deemed to be an employee or not, often using HMRC’s Check Employment Status for Tax (CEST) tool
• Issue a formal Status Determination Statement (SDS) confirming the outcome of the status assessments
• Implement a formal dispute process, which allows workers to challenge any decision made

Where the rules apply the organisation, agency or third party paying the worker’s company, will need to deduct income tax and national insurance contributions (NICs) from payments to the worker’s PSC, and pay employer’s NICs, as they would for an employee.

Small business exemption for off-payroll working

As the legislation only applies to medium and large businesses (outside of the public sector), those companies that are small do not have to apply the rules. In these cases, the PSC will continue to assess their own IR35 status and be liable for their own tax deductions, where appropriate.

Small businesses are those that meet two of the three tests below:

• Turnover – not more than £10.2 million
• Balance sheet total – not more than 5.1 million
• Number of employees – not more than 50

Any entity that is identified as small using the above guidance will still be required to assess if they are small, when they form part of a group of companies. If the ultimate parent company is not small under the above criteria, then none of their subsidiary companies will qualify as small.

What are the issues and risks facing employers for IR35?

While a lot of businesses did adequately prepare for the IR35 changes, many did not. They may not have been actively hiring labour through limited companies at the time, considered themselves to be ‘small’, or just had a genuine confusion about how and when the rules apply. There are additional complications regarding overseas contractors, and we’ve seen many examples where businesses aren’t aware of exactly who their contractor population are, or how they are engaged.

End-users who incorrectly classify workers working via an intermediary as being outside IR35 can be held liable for the PAYE, NIC, and Apprenticeship Levy due if HMRC successfully challenge the worker’s status and reclassify them as being inside IR35.

We expect HMRC to increase the level of compliance activity in this area. Now is a good time to ensure your IR35 procedures and processes are still suitable and facilitate compliance with the rules. You may want to:

• Undertake labour supply chain due diligence to ensure that all engagements falling within IR35 are still being identified
• Ensure internal teams and hiring managers have sufficient ongoing training to raise awareness of IR35 and reduce the risk of non-compliance and demonstrate reasonable care to comply
• Consider revisiting status determination statements previously issued following any potential updates to the working arrangements and the latest updates in case law

How can we help?

If you require any further information or advice on any of these matters, please contact our Employer Solutions team. We would be happy to have an initial informal discussion to further explore the ways in which we can help your business comply with these complex rules.

For more information on our wider services for employers – employment tax compliance, construction industry scheme, share schemes, salary sacrifice and payroll you can read more on the dedicated webpage – Employer Solutions