The government reformed the off-payroll working rules (also known as IR35) from April 2021. It’s important not to underestimate the impact these changes have had including leading organisations to explore alternative resourcing arrangements for contingent workers.
Different organisation types have been affected by the changes in different ways:
- private sector businesses;
- recruitment sector businesses;
- public sector organisations;
- real estate and construction businesses; and
- individuals providing services via Personal Service Companies (PSCs).
Overview of the IR35 changes
The changes were introduced to make sure that an individual who works like an employee, but through their own intermediary such as a limited company, pays broadly the same Income Tax and National Insurance contributions as other employees. The rules do not apply to the self-employed who should be subject to separate status checks.
The rules require organisations to determine the tax status of workers engaged through Personal Service Companies or certain other intermediaries. Where it is determined that a worker would be an employee for tax purposes, if they were engaged directly by their end client, payments need to be subject to PAYE and NIC through the payroll.
Who is affected?
- Around 60,000 engager organisations, predominantly medium and large-sized businesses outside the public sector that engage with individuals through intermediaries such as Personal Service Companies
- Public sector organisations
- Recruitment agencies and other intermediaries, around 20,000 of whom supply staff through PSCs.
- Individuals who supply their services through an intermediary, such as a PSC, and who would be deemed employed, if engaged directly.
Overview of the measure
The reform, which was based on the previous public sector IR35 rules, places the burden for assessing whether IR35 applies onto medium and large private sector and public sector end users from 6 April 2021.
Where it is concluded by the end user that IR35 applies, the fee payer (which may be the end user or a recruitment agency or other third party paying the intermediary) is responsible for accounting for and paying the related tax and NIC, including the additional cost of the employer’s NIC, to HMRC.
An estimated 1.5m small organisations are exempt.
Small company exemption
In the private sector the rules only apply to medium and large businesses that are the end user of the worker's services who have a UK connection for a tax year and to the fee payer, if different, for example a recruitment agency.
Where the end user of the worker’s services is a small business, the responsibility for assessing the arrangements, and applying IR35, remains with the intermediary such as the PSC.
A small business is defined by the Companies Act 2006, this is broadly a business that has two or more of the following features:
- a turnover of £10.2m or less;
- a balance sheet total of £5.1m or less; and/or
- 50 employees or less.
End users are required to provide to a person (likely to be a PSC or fee payer) on request a statement as to whether in their opinion they qualify as small for the tax year specified in the request generally within 45 days of receipt.
Special rules apply for joint ventures, subsidiaries and connected persons.