New off-payroll working rules came into effect on 6 April 2021. These may affect you if you if you are a private sector organisation that engages workers who provide their services through an intermediary, such as a personal service company, or if you are a worker who provides your services in this way.

Private sector engagers

The rules will affect you if you are a medium or large private sector organisation that engages workers who provide their services through an intermediary, such as a personal limited company. You will be classed as a medium or large private sector organisation if at least two of the following apply to you:

• your annual turnover is more than £10.2 million;
• your balance sheet total is more than £5.1 million;
• you have more than 50 employees.

If one or none of the above apply to you, you are classed as a ‘small’ organisation and do not need to comply with the new rules.

Medium and large private sector organisations

If you are classified as a medium or large private sector organisation by applying the above tests, you will need to comply with the new off-payroll working rules for engagements that are live on or after 6 April 2021 whenever you engage a worker who provides their services through a personal service company or other intermediary. For all engagements of this nature, you must:

• determine whether the worker would be an employee if they provided their services directly to you. (HMRC’s Check Employment Status for Tax (CEST) tool, available on the Gov.uk website, can be used for this purpose);
• give a copy of the determination and the reasons for reaching the decision that you reached to the worker, and to any other parties in the chain;
• if the determination is that the worker would be an employee, calculate the deemed direct payment by excluding VAT and the cost of materials from the amount billed by the worker;
• calculate tax and employee’s National Insurance on the deemed direct payment and deduct this from the payment that you make to the worker’s personal service company;
• account for employer’s National Insurance on the deemed direct payment and pay this together with the tax and employee’s National Insurance deducted from the payment over to HMRC; and
• report the pay and deductions to HMRC under Real Time Information, making it clear that the worker is an off-payroll worker.

It is important that you apply the rules as you may be penalised if you fail to do so.

The rules will impose additional costs on you, as you will need to pay employer’s National Insurance contributions on payment made to the worker’s intermediary. You should budget for these.

Small private sector organisations

If, by applying the above tests, you are classified as a small organisation, you do not need to worry about the extended off-payroll working rules and can continue to pay the worker’s personal service company gross. You do not need to undertake a status determination or deduct tax and National Insurance from payments made to the worker.

Workers providing services through a personal service company

If you are a worker and you provide your services to a private sector organisation, the changes to the off-payroll working rules will affect you if your end client is classed as medium or large. You should ask the client to confirm their size when agreeing the engagement.

For engagements on or after 6 April 2021, you will not need to apply the IR35 rules. Instead, the end client will determine your status and give you a status determination. If you do not agree with the determination (for example, if the end client determines that you would be an employee if you provided your services directly and you think you would be self-employed), you should tell the end client. Within 45 days, the client must either confirm that their original determination stands or issue a new determination.

If you are assessed as an employee and fall within the off-payroll working rules, the client will deduct tax and National Insurance from payments that they make to your personal service company. You will receive credit for this tax and National Insurance against payments that your personal service company makes to you personally.

If you fall within the scope of the new rules, you may wish to consider whether you want to continue working off-payroll or whether you would be better working as an employee.

The new rules do not apply to services provided to an end client that is classed as ‘small’. Consequently, you will still need to consider the IR35 rules if you provide your services to a small private sector organisation beyond 6 April 2021. As previously, you will need to determine whether you would be an employee if you provided your services directly, and if so, calculate the deemed employment payment on 5 April at the end of the tax year, and account for tax and National Insurance on that payment direct to HMRC.

We can help

If you have doubts about any of the matters outlined in this update, please call so we can advise you accordingly.

This area of taxation is challenging and the downside risks for making the wrong judgement can be severe.