Off Payroll Legislation

What you need to know about the off-payroll changes coming to the private sector in April 2021

Yes, it's finally coming!

Those much-maligned changes to the off payroll rules, that were due to be implemented in April 2020, are nearly here. Whilst the global pandemic brought us a temporary reprieve, it can’t last forever. So now is the time to prepare.

‘But, Laura, it’s only November…April is months away yet and I’ve got Christmas to enjoy and the end of the Brexit transition to endure first’, I hear you say. And whilst that is entirely true, it’s also really important that you get this right and leaving it to the last minute to understand and implement the rules is not conducive to getting it spot on.

In case you’ve had your head buried in the sand for the last year (and honestly, who could blame you?!) here’s what is coming…

The date for your diary...

On 6th April 2021, the government is extending the off-payroll rules from the public to the private sector. The new rules apply to payments made to intermediaries, such as PSCs (or Ltd Company Contractors as they may be known) and mean that the PSC will no longer be responsible for managing IR35. The tests for IR35 status are not changing, but it is now the client who must assess the IR35 status of each assignment and the fee payer (i.e. the agency) who is responsible for making PAYE and NIC deductions from the PSC if the assignment is found to fall inside IR35.

Sounds simple, right?! It certainly feels like it should be, but equally there are nuances and variations to be aware of to ensure you, the agency, remain compliant. You’ll also want to be able to successfully field questions from PSCs and clients alike, as well as training your staff and getting robust processes in place.

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It seems that you are ready! If you feel you are, why not give Isotope a call & get the ball rolling!

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Where to start then?

First of all, a brief refresh on IR35. IR35 applies when a worker is paid via an intermediary, like a PSC or Limited Company, and where the worker has a material interest in the intermediary. The most common example is where a contractor works via their own Limited Company to provide services to an end client, and where the contractor wholly owns their Limited Company. Technically, they have a material interest in their business if they hold 5% of shares or more.

As we know, there is a tax benefit for contractors working in this way, as they have access to dividends by virtue of being a shareholder, which are taxed at a lower rate than if paid via PAYE. HMRC were concerned that individuals who were really employees (they looked like employees, acted like employees, were treated like employees and so on) for tax purposes were simply using this arrangement to pay less tax and so legislation (Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)1) was introduced to ensure that, where the contractor looked like an employee of the client for tax purposes, then their assignment was deemed to be ‘inside IR35’ and therefore their pay should be subject to PAYE tax and national insurance, as well as employers’ national insurance also being due.

What rules are they extending?

Enhanced rules around IR35 and off payroll working came into effect in the Public sector in 2017. At that point, responsibility shifted from the PSC to the client to determine IR35 status i.e. inside or outside IR35, for each assignment. And when the assessment was that the assignment fell inside IR35, it became the fee payer’s responsibility to deduct tax and national insurance payments from the PSC. The fee payer is the person or entity next in line to the PSC in the chain and would generally be an agency.

There have been some amendments to the rules as they are implemented in the private sector, which will apply across the board, so it’s not a carbon copy.

Who will be affected?

As you can see, this is a fairly huge change in legislation and process. Not only will agencies be affected, but clients will find themselves needing to change their processes and some contractors working via their own PSCs may need to consider alternative methods of working.

The rules will continue to apply to public sector organisations and will now also apply to private sector companies who are not exempt (more on exemptions later). You, the agency, will need to know if your client is exempt or not and you’ll also need to be transparent with the client about how you are engaging the worker (be that PSC or PAYE). The key here is to remember that, unless the client is exempt, they must assess the workers’ status for the purposes of tax.

Who is exempt?

The question on everyone’s lips…

First, it’s important to note that it is the client who is/isn’t exempt, not the agency. A client will be exempt if they are classed as a small company and a small company is one which meets two or more of the following criteria:,/p>

1. Annual turnover of not more than £10.2 million,
2. Balance sheet total of not more than £5.1 million, or
3. No more than 50 employees.

Companies in groups and joint ventures will be exempt provided all of the group companies or joint venture partners are small. Unincorporated organisations with a turnover of less than £10.2 million will also be exempt.

How do you know if a client is exempt?

Long story short, you have to ask! The client is not obliged to proactively tell you that they are classed as a small company and therefore are exempt. But they are legally obliged to respond for any request you make to confirm their size for the purposes of IR35 within 45 days (after 6th April 2021). If they don’t respond, they are deemed to be the fee payer until such a time as they are confirmed to be exempt.

Overseas companies are also deemed to be exempt, if they have no physical presence in the UK. But be careful not to make an assumption on this and be sure to obtain confirmation from the client that this is the case.

If the client is not exempt, what must they do?

It is the clients’ responsibility to assess whether the assignment falls ‘inside’ or ‘outside’ IR35 and they must do so by using an appropriate assessment process. Once they have implemented the appropriate assessment process, they would issue a ‘status determination decision’ (SDS).

The client is free to use whatever assessment process they wish, provided it is appropriate and they use ‘reasonable care’ in assessing the assignment. HMRC have put together their own tool ‘Check employment status for tax’ or CEST, although it has not met with the most positive feedback. Many clients, agencies and contractors using the tool have found it ineffective, difficult to use and returning inconclusive results. However, HMRC continue to develop the tool and listen to feedback to improve it. They have said that, provided the information provided to the tool is accurate, they will stand by any outcome it returns.

The key here for clients, and something you may find yourself educating them on, is that they must take reasonable care and therefore blanket decisions such as ‘all contractors are inside/outside IR35’ are not acceptable. However, blanket decisions to not use contractors who work through PSCs anymore at all, is acceptable as off payroll rules therefore won’t apply and so the client is not obliged to take reasonable care in their assessment of the assignment.

How a client is judged to have taken reasonable care is also subjective – the threshold for larger companies with access to more specialist resources and bigger budgets is likely to be higher than the threshold for smaller businesses. Reasonable care will always mean having a proper process to assess assignments, having the correct, relevant, and latest information to make a decision and also having the right person to make the decision.

What happens if the client gets it wrong? And what happens once a status decision is made?

If the client gets the decision wrong, provided they can demonstrate they used reasonable care in reaching the SDS, the client will not be liable for unpaid tax and NICs.

Once the client has issued an SDS, it should be passed down the chain and shared with both the agency and the contractor, along with the reasons for their determination.

What if the agency or the contractor/worker disagrees with the clients’ decision?

You may find yourself in a situation where you or the worker disagree with the client’s decision on IR35 status. In this case, the client must be notified that you/the worker disagrees and the reasons why they believe the SDS is incorrect.

The client then has 45 days to respond and must either:

1. confirm that it has considered the representations made and decided that its SDS is correct, and give the reasons for that decision; or
2. give a new SDS containing a different conclusion and state that the previous SDS is withdrawn.

If the client does not respond with 45 days, they are deemed to be the fee payer.

The agency’s obligations – if the status is determined as inside IR35, what does the agency do?

As the fee payer, the agency must:

1. Calculate the ‘deemed direct payment’ due to the PSC
2. Deduct PAYE tax and NI from that payment
3. Pay the relevant Employers NIC on that payment – it’s worth noting here that the agency would need to make a decision about how these charges would be incorporated into the charge rate to the client. It’s also worth noting that the employment allowance cannot be used to the cost of these contractors/PSC workers.

What is the deemed direct payment?

The total sum that would have been due to the PSC (not including VAT), minus the direct cost of any materials used by the PSC to complete the work, minus any expenses that would have been deductible had the PSC been an employee of the client. This is the deemed direct payment on which the PAYE tax and NIC calculations would be performed. VAT would then be added back before the payment is made to the PSC.

The fee payer would request the workers’ PAYE tax code and National Insurance number to enable them to make the calculations correctly. Without this information, emergency tax would be applied.

What are the alternatives?

In reality, we know many agencies will simply choose not to engage PSCs for assignments that fall inside IR35. Either the agency can engage the worker directly via PAYE or they may utilise an umbrella company to pay the off-payroll worker.

Where does liability rest?

A party’s liability will depend on whether they are the agency, fee payer or client, but also will depend on whether they have done what they should have done during the process. For example, the client becomes liable as a fee payer until it passes the SDS to the next party in the chain (normally the agency) and the worker.

Liability is a complex matter and we are awaiting a final say from HMRC on liability and guidance on who is liable for unpaid tax/NICs and in what circumstances. Needless to say, beware of any party who states they can take the liability from you and ensure that you will never be liable for unpaid tax/NICs.

What other effects should the agency be aware of?

Apprenticeship levy – where the agency brings off-payroll workers onto it’s payroll, it’s apprenticeship levy costs will increase or it may pass the threshold at which it falls within the scope of the apprenticeship levy.

Employment status – it’s important to distinguish between being classed as an employee for tax reasons (as those falling inside IR35 will be) and being classed as an employee for employment rights purposes. If a contractor falls inside IR35, it does mean they automatically have employment rights such as pension auto-enrolment or holiday pay.

Key Information Documents – should be updated to reflect the differences between inside and outside IR35 for PSCs and the example pay.

Contracts and terms of business – should be reviewed in plenty of time prior to April 2021 and should reflect the working practices. It is not possible to have a contract in place to circumvent IR35 and the new rules…HMRC will simply look at what is actually happening rather than what the contract says. This is a good opportunity to get updated terms of business signed by your client and also to take the opportunity to educate your client on the upcoming changes and the new processes that will need to be in place.

What's next?

Want all this important information in an easy, downloadable PDF? You got it! Click here.

In the meantime, the team here at Isotope are busy reviewing and updating contracts, and we’ll share those with you as soon as possible, and in plenty of time before April.

If you have any questions about the changes, please let us know and we’ll be happy to chat to you in more detail about the steps you can take to make sure you are ready.

Otherwise, now is the time to make sure you understand the new rules and to start identifying the changes in your processes. This may involve educating your team, clients and contractors, so start early.

If your clients make a blanket decision not to engage workers via PSCs, then make sure you communicate this in plenty of time to your workers and have some options at hand to share with them.

Above all, we’d encourage you to prepare early and talk to the team here at Isotope if you need help.

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