Will New Off-Payroll Rules Affect You?
Imminent Changes for Limited Companies on off-payroll worker rules by April 6, may impact how you pay tax.
Whether you are a contractor operating a personal services company (PSC), or client (medium/large company) whose responsibility it is to manage worker PSC tax affairs – be aware of what off-payroll is, so you can take the necessary steps if this affects you.
For those running limited companies as sole shareholders – as PSCs – providing services through their own company, change is heading your way on April 6 2021. On this date the ‘off payroll’ working rules currently affecting public sector contracts are being extended, to include medium and large private sector businesses too.
Two decades ago, after years of HMRC struggling to enforce compliance with IR35 (a clamp down on those avoiding payroll taxes by running their businesses through a *PSC, a limited company, with sole shareholder) – IR35 legislation came along. IR35 required a person working through a PSC to consider whether without the PSC they, the worker (contracting direct to client) were in employment rather than self-employment.
After years of HMRC battling to get compliance with IR35, in 2017 new rules came in for PSCs contracting with public sector engagers, referred to as ‘off-payroll working’ rules. The rules here made the client (e.g. NHS) determine whether there is an underlying employment relationship with the worker.
The responsibility rested with the engager rather than PSC, meaning the worker does not have the risk of an IR35 enquiry on their company.
The government is now extending these rules to many private sector clients of PSCs from 6 April 2021 following successful rollout of this, which in the main has put a stop to many people avoiding paying payroll taxes when they should be.
Calculating worker status
The following questions determine whether on balance a personal service company is an employment relationship with a contracted company. If you answer ‘yes’ to the following questions this will indicate you are an employee of the client for tax purposes:
- Do you undertake the work you agree to do yourself?
- Can someone tell you what to do and when you do it?
- Does someone provide you with holiday/sick/pension pay?
- Are you paid an hourly rate on an agreed number of hours?
- Do you work wholly or mainly for one business?
- Are you expected to work at the premises of the person you are working for or a place they decide? (this can be ok if you are a trades person though)
The following questions indicate the contract is effectively a self-employed one and not subject to payroll taxes:
- Are you responsible for how the business is run (risk own capital, responsible for bearing losses, control what to)?
- Do you provide major equipment needed for the work?
- Are you free to hire other people?
- Do you have to correct work in own time at your expense?
Cases can be difficult to decide on and the devil is often in the detail.
How will this work on the ground?
Off-payroll rules apply to medium/large companies in the private sector from 6 April 2021. Under new rules, large and medium sized private clients must decide if the worker would be an employee. Small means less than £10.2m, less than £5.1m and less than 50 employees. For unincorporated partnerships, turnover is used.
The client must provide a Status Determination Statement (SDS) to the contractor and all relevant parties e.g. a recruitment agency at the time the contract starts or before the off-payroll worker starts work. All businesses using contractors must make sure they have appropriate processes in place to produce and pass on the SDS to all relevant parties.
In the absence of this, the PSC’s client will take on the responsibilities of the fee payer (if not the fee payer) to operate PAYE and NIC where applicable. If the client decides off-payroll working rules apply, the client (or agent responsible for paying fees to PSC for worker services) must create a payroll record for the worker. This means they must, get an NI number from the worker, withhold PAYE and NIC when paying invoices of the PSC, account for employer’s NIC and send the worker a p60 if still engaged at tax year-end or P45 if engagement has ceased.
Although they must treat the worker as if they are an employee for payroll tax purposes, the worker has no employment rights at all from the client – no employment allowance to exempt NIC class 1 on deemed salary, or student loan deductions.
Client duty of care
A client must take reasonable care when making a determination. HMRC guidance cites various examples of what does not constitute reasonable care:
- determining every worker who provides services though an intermediary is caught by off-payroll working rules without consideration to facts of each case
- failing to reconsider material changes in circumstances
- inputting inaccurate info into CEST (tool determining status)
Tens of thousands of contractors moved onto payroll as a result of the public sector rollout of off-payroll rules in recent years. As for many parties, it was deemed they were better off as an employee – gaining holiday and other benefits when paying off-payroll taxes.
If you are operating via a personal services company, new rules from 6 April 2021 are complex and may have consequences for your business. Ask your clients firstly whether they are small, or medium/large in size. Then, a medium/large client will need to issue you with a Status Determination Statement (SDS) and check that you agree with it. If you disagree, raise your concerns with the client and expect an answer in 6 weeks.
Secondly, recognise there is still an employment status risk for your PSC if it exists under IR35 rules, where a client is small. Consider whether a PSC is the best way for you to run your business if you’re being put on payroll for tax purposes.
As this is complex – why not reach out for help on these matters. you can get in touch with our team of tax specialists at LHP by email email@example.com or by ringing us on 01267 237534.
*A personal service company or PSC is a limited company set up to provide the services of a single contractor who is usually the sole shareholder and company director of the business. This features heavily in the context of the government’s rules to determine employment status – also known as IR35.