For many months now, businesses have been closely following discussions around the extension of off-payroll tax rules (sometimes known as ‘IR35’) to the private sector. While it was originally planned for the changes to apply from 6 April 2020, the outbreak of coronavirus (COVID-19) has prompted the government to delay the changes until 6 April 2021.
A lot of the concern around off-payroll working rules stems from the complexity of the legislation and the responsibility it places on employers to determine whether or not off-payroll working is applicable to individual workers.
We’ve put together a short overview of off-payroll working below to help provide some clarity – and to explain how Zellis can support you in achieving compliance.
What is off-payroll working?
Part of the Finance Act 2019, off-payroll working is widely regarded as one of the biggest shakeups to the contracting market.
The legislation enables HMRC to collect additional tax payments where a contractor is deemed to be an employee in all but name. In other words, if it wasn’t for an intermediary (usually a personal service company), that contractor would effectively be a direct employee of the client. If this is the case, the client must put the contractor onto its payroll and deduct the appropriate National Insurance contributions (NICS) and income tax.
The off-payroll working rules were introduced for public sector organisations as part of the March 2016 Budget, formally coming into effect on 6 April 2017. Four years on, private sector organisations are set to face the same change.
The rule change is estimated to apply to approximately 230,000 contractors in the UK. Owing to the significant use of contractors, companies in sectors such as financial services, construction, pharmaceuticals and recruitment are amongst the most likely to experience the biggest shakeup to their payroll operations.
Why is it being introduced?
The reforms are being introduced as a measure to help reduce “disguised employment” – a phrase used to describe contractors using a limited company to bill for their services, and therefore avoid paying NICs and income tax. Client companies also avoid paying employers’ NICs through this form of arrangement. In fact, HMRC has stated its belief that only 10% of private sector contractors are paying the right amount of tax under the current rules. The other reason for extending off-payroll working rules to the private sector is to help raise additional tax revenue.
Who does it apply to?
It’s important to note that the extension of off-payroll working rules will only apply to private sector organisations of a certain size. It won’t apply to small companies and the self-employed, who can continue using workers operating through their own limited company or partnership without being concerned about their status, as it will still be a matter for the contractors to assess themselves.
So, how is a small company defined?
To be defined as a small company, a business must meet two out of three of the following criteria for two successive accounting periods:
- Turnover doesn’t exceed than £10.2m
- Balance sheet doesn’t exceed £5.1m
- Average number of employees doesn’t exceed 50
Note that no public sector organisation will be considered small.
How do you work out a contractor’s employment status?
At the heart of the complexity of off-payroll working compliance is the task of determining a contractor’s employment status.
So, what are the key factors to consider?
- Substitution: Can the contractor send a substitute, rather than carry out the work personally?
- Mutuality of obligation (MOO): Does the contractor have the ability to control which work it does and doesn’t perform?
- Autonomy: Does the contractor have freedom over where, when and how to complete the tasks they have been asked to perform?
If the answer to any of these questions is ‘No’, it’s an indication that the contractor is a disguised employee, and therefore off-payroll working rules apply.
This means that businesses must issue a ‘Yes’ Status Determination Statement (SDS) to the contractor before payment of the first invoice, which details the reasons why the rules apply.
After this, they must add the contractor to the payroll and:
- Deduct tax, NI, and apprenticeship levy from their invoiced fee
- Pay this over to HMRC as part of the employees’ statutory deductions
- Pay the net amount and any VAT and expenses to the consultant
- Issue a P45 at the end of the contract and a P60 at the end of the year
They must not auto-enrol the consultant or offer any statutory payments or student/postgraduate loan deductions. Workers will make repayments through self-assessment.
Even if the contractor is deemed not to fall under off-payroll working rules, businesses may still choose to issue a ‘No’ SDS. It’s considered to be best practice to issue both ‘Yes’ and ‘No’ SDS in case HMRC later decides that the business had made the wrong decision and suddenly becomes liable for all of the tax, NI and apprentice levy payments.
On receipt of the SDS, the contractor or the fee-payer (agency) can appeal, and the business has 45 days to respond and uphold the decision or withdraw it. In the meantime, withholding tax and NI continues, so if the decision is reversed the payroll will have to be corrected to remove the worker and refund the tax and NI.
How Zellis can help
Despite the delay in extending off-payroll working rules to the private sector, it remains in the best interest of businesses to act soon if they are not already prepared.
At Zellis, we have introduced new Off-Payroll Workers functionality in our award-winning payroll software, ResourceLink. This will allow customers to identify and correctly report on off-payroll workers, allow invoices and payments to be processed on time through ResourceLink, and produce remittance advice in replacement of a traditional payslip with details of the invoice. As a result, ResourceLink users will feel confident in their compliance with off-payroll working rules.
To find out more, get in contact today.