If you are currently working in the public sector, you may be aware of the off-payroll working rules that were brought into force in April 2017, also known as IR35.
On 6 April 2021, the UK government extended these rules to include any medium to large businesses in the private sector.
What is IR35?
IR35 legislation, which is also referred to as the off-payroll working rules, is a set of rules about preventing disguised remuneration. It is designed to make sure that anyone who works as an employee, but through an intermediary; their own Personal Service Company (PSC) or Limited Company, pays broadly the same income tax and National Insurance as those candidates who are employed directly.
What is a small business exemption?
HMRC has given a concession to small businesses in the private sector who will be exempt from this legislation. Generally, a company will qualify as a small company where two of the following are satisfied:
- Annual turnover – not more than £10.2 million
- Balance sheet total – not more than £5.1 million
- Number of employees – not more than 50
What has changed and why?
IR35 was introduced by HMRC in 2000 to tackle the problem of contractors working via their PSC to gain a tax advantage. To ensure greater compliance, they have changed where the responsibility for applying these rules sit, from the intermediary to the end hirer.
Who decides if a worker falls in scope of the IR35 rules?
The decision on whether IR35 applies to the working arrangement will sit with the client where the work is being conducted. It is, therefore, not up to the intermediary worker to provide evidence of whether IR35 applies, but rather it is the end hirer who is responsible for determining your IR35 status and ensuring that you are paid and taxed correctly based upon their assessment of your employment status.
If IR35 applies, how is that decision made?
There are a set of specific rules in the IR35 legislation that the public sector body or private sector will apply when making this decision. In simple terms, IR35 requires them to assess whether your relationship is genuinely independent, or more like employment.
Therefore, they are responsible for reviewing every contract with reasonable care. After doing so they must provide a Status Determination Statement (SDS) that clearly states the decision they have made and the reasons behind it.
Who does this impact if the rules are deemed to apply?
The IR35 rules impact any public or private sector agency worker who is not currently paid via PAYE.
This change affects you if you are being paid through any of the following arrangements:
- You work through your own personal service company (PSC)
- You work through an intermediary for an umbrella company
- You are paid gross as a self-employed worker
Who is the Fee Payer?
If you are inside IR35 then your fee payer is the party above your PSC who is responsible for deducting tax and National Insurance.
For the majority of contractors, the fee payer is normally a recruitment agency. However, if your PSC is paid directly by the end hirer then they will be the fee payer and they would be responsible for deducting tax and National Insurance contributions.
What happens if these rules are deemed to apply?
NHS Trusts, Health Boards and private sector clients are responsible for informing locum agencies and workers if their role falls inside or outside of IR35 legislation. Being inside IR35 will impact the way in which you are taxed. The fee payer, which is the last entity to make payment to the worker, is responsible for the deduction of the relevant tax and National Insurance. The deductions are withheld from payment to the intermediary and paid over to HMRC on their behalf (this is not the same as PAYE).
Sources: HMRC, IPSE
We have collated a list of useful resources and webpages which provide more guidance about the IR35 legislation.
HMRC guidance: Understanding off-payroll working (IR35) HRMC guidance
Off-payroll working in the public sector: changes to the intermediaries legislation (22 August 2019, updated 18 May 2021)
Understanding off-payroll working (IR35)
April 2021 changes to off payroll working for intermediaries and contractors (published 22 August 2019, updated 14 January 2021)
April 2021 changes
HMRC employment status tool
(published 2 March 2017, updated 4 May 2021)
Check employment status for tax
Off-payroll working in the public sector (published 3 February 2017, updated 6 April 2021)
Public sector off-payroll working for clients
Find out if IR35 applies to you (published 22 August 2019, updated 18 May 2021)
Understanding off-payroll working (IR35)
Off-payroll working (IR35) enquiries