What is IR35?
IR35 is a method HMRC have put in place to determine whether any intermediaries providing services to other businesses are paying a broadly the same amount of tax & NI that they would if they were an employee.
An intermediary, sometimes known as a contractor provide their services via their own business, whether that be a limited company, a sole trader or partnership or as an individual.
The client is the organization receiving these services of a contractor. They are also known as the engager, hirer or end-client.
Persons/organisations affected by IR35 may be:
- a worker who provides their services through their intermediary
- a client who receives services from a worker through their intermediary
- an agency providing workers’ services through their intermediary
The IR35 rules apply if the worker would be classed as an employee if they were contracted directly to provide the services they are providing. The contract is a written, verbal or implied agreement between client and worker.
The off-working payroll rules apply on a contact-by-contract basis, so some contracts may fall under these rules, but some may not.
If the off-working payroll rules apply, then tax and NI must be deducted from fees and paid to HMRC. In addition, Employer NI and Apprentice Levy, if applicable, must also be paid to HMRC. Basically, their pay is processed as if they are an employee on the payroll, and they are classed as a ‘deemed employee.
What are the changes to IR35?
BEFORE 6th April 2021:
If you were a worker and your client was in the public sector, it was the responsibility of the client
to decide your employment status.
If you were a worker and your client was in the private sector, it was the responsibility of the intermediary to decide your employment status for each contract. The private sector includes 3rd sector organisation (some charities).
FROM 6th April 2021:
It is the client that will be responsible for determining if the off-payroll rules apply. This is clients of:
- All public sector authorities
- medium and large sized- private sector clients
If a worker provides services to a small client in the private sector, the workers’ intermediary will remain responsible for the decision as to the workers employment status and if the IR35 rules apply.
How to check a workers Employment Status
The 3 keys tests/questions for checking a workers employment status are:
- Have you (the client) specifically hired the worker (contractor) personally? Or does the worker have the right of substitution?
- Do you (client) ‘control’ the contractor? Control is referring to what, where, when and most importantly how the contracted job is to be done.
- Is the contractor obliged to continually accept work offered, and is the client obliged to continually offer work to the contractor?
By answering yes to these questions would indicate that the worker is classed as a deemed employee and off-payroll working rules apply.
HMRC also have a ‘Employment Status Checker’ service to help clients decide if the off-payroll working rules apply. (insert link https://www.gov.uk/guidance/check-employment-status-for-tax)
If off-payroll working rules apply – what next?
If a worker’s service provision falls within the IR35 and they are recognised as a ‘deemed employee’ the client would need to deduct tax and NI and pay this direct to HMRC BEFORE paying the worker their fees.
These payments would need to be reported to HMRC on the FPS submission managed within the payroll.
This means the payroll software a client uses will need to be IR35 ready. Contact your payroll provider to check this.
What are the effects on the payroll?
There are many factors that need to be considered for workers classed as ‘deemed employees’:
- The off-payroll working rules apply on a contract-by-contract basis, so each contract would need to be checked, as not all would need to be handled through the payroll and have tax and NI deducted.
- Tax and NI would need to be deducted from any part of the deemed employee’s invoice that relates to work.
- The client is not obliged to offer the Auto-Enrolment pension scheme to deemed employees.
- Deemed employees do not qualify for the same employment rights as an employee, such as holiday, sickness or parental leave.
- Any NI deducted from a deemed employee should not be included in employer NI allowance calculations.
- Apprenticeship levy calculations should be applied for deemed employees
- Deemed employees should receive a P45 when they leave and can also receive P60s at PAYE year-end.
What are the effects for the worker classed as a deemed employee?
The deemed employment paid to workers under this IR35 ruling is classed as employment income from the client, or their intermediary. Workers should therefore include it with any other employment income on their self-assessment tax return.
The client would provide a P60 to the worker. Any tax and NI contributions deducted will be recorded as such on the P60, and as such recorded on the workers self-assessment tax return. This ensures there is no risk of double taxation.
Still unsure?Do you want your payroll managed in the most efficient and compliant way for you and your workers? Contact CJ Bookkeeping to discuss how we can take away the hassle of processing off-payrolled workers.