New rules and regulations have been introduced around off-payroll working, also known as IR35, in the private sector.
The legislation is primarily aimed at contractors and freelancers who work via a personal service company (PSC), as well as the businesses that utilise their services, who are often referred to as engagers or end clients.
Under the new rules, all medium and large-sized private sector end clients are responsible for determining a contractor’s employment status, as opposed to the previous rules, where workers determined their own employment relationship with clients.
The reforms have been introduced following reports that certain workers using PSCs were paying less tax, even though they were working as if they were employed by the client. This is sometimes known as “disguised employment”.
As the new rules place the burden of responsibility for determining the employment status on the engager of a contractors’ services, businesses should need to implement the necessary controls to determine IR35 status and where a contract is found to be insider IR35, pay the contractor via PAYE.
What do businesses need to know?
As the engager of a contractor working through a PSC, it is now your responsibility to determine if they are paying the correct amount of tax.
Employers are required to provide an employment status determination for every worker that you agree a contract with. The official guidelines are as follows:
- Pass your determination and the reasons for the determination to the worker and the person or organisation that you agree a contract with
- Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- Have processes in place to deal with any disagreements that arise from your determination.
If the determination results in a contractor being within the IR35 rules, you must deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.
Where an employer fails to correctly identify a disguised employment scheme, the employer becomes liable for the worker’s tax and National Insurance Contributions.
Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct, and pay tax via PAYE on the contractor’s remuneration.
To assist with determining the correct employment status, businesses can use the Check Employment Status for Tax (CEST) tool, found here.
This tool has undergone many changes since its launch, but businesses should be aware that under certain circumstances it may not always provide the correct determination, which is why seeking expert advice is crucial.
Soft landing period
The Chancellor, Rishi Sunak, has offered reassurance to contractors that HMRC will ensure a soft landing is in place for the first 12 months following the implementation of the new IR35 rules.
This means that HMRC will not impose strict penalties on businesses that breach the rules during the first year, allowing firms to adjust to the new requirements.
Exemptions
The new off-payroll working rules only apply to medium and large employers. According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:
- The company has a turnover of £10.2 million or more
- The company has a balance sheet total of £5.1 million or more
- The company has 50 employees or more
For help and advice with the new off-payroll working rules, please contact our expert team today.
