Off payroll working and IR35

Off payroll working applies to who provide services through an intermediary such as their own personal service company (PSC)

In April 2021, these rules were extended from applying just to the public sector to include medium and large sized businesses in the private sector.

When off-payroll working rules apply, the payer must deduct income tax and national insurance contributions (NICs) from payments to the worker’s PSC and pay employer’s NICs as for an employee.  

The off-payroll working rules aim to ensure that contractors working through PSCs are genuine off-payroll workers. They’re not working under a contract of employment. This shifts the responsibility for determining the employment status of workers hired through a limited company from the worker’s limited company to the hiring entity. 

As a result of the off-payroll working rules, businesses need to: 

• Assess whether the worker would be deemed to be an employee or not, often using HMRC’s check employment status for tax (CEST) tool 
• Issue a formal status determination statement (SDS) confirming the outcome of the status assessments 
• Implement a formal dispute process, which allows workers to challenge any decision made 

Small business exemption for off-payroll working

As the legislation only applies to medium and large businesses (outside of the public sector), small companies do not have to apply the rules. In these cases, the PSC will evaluate their own IR35 status and be liable for their own tax deductions, if necessary. 

A small businesses meets two of the three criteria below: 

• Turnover: not more than £10.2 million 

• Balance sheet total: not more than £5.1 million 

• Number of employees: not more than 50 

If a small business is part of a group of companies, it must assess its size within the group. If the ultimate parent company does not meet the small business criteria, none of its subsidiaries will qualify as small. 

What issues and risks do employers face for IR35?

While many businesses did prepare for the IR35 changes, many did not. There are additional complications regarding overseas contractors and we’ve seen examples of businesses not being aware of who their contractor population is or how they are engaged. 

End-users who incorrectly classify workers working via an intermediary as outside IR35 can be held accountable for the PAYE, NIC, and apprenticeship levy due if HMRC successfully challenges the worker’s status and reclassifies them as inside IR35.

Now is a good time to review your IR35 procedures and ensure compliance. You may want to: 

• Conduct labour supply chain due diligence to identify all engagements falling within IR35  

• Provide ongoing internal teams and hiring managers to raise awareness of IR35 and reduce the risk of non-compliance 

• Revisit status determination statements previously issued following any potential updates to the working arrangements and recent case law developments