Updated 18 October 2022

UPDATE

On 17 October the new Chancellor, Jeremy Hunt, announced in his Fiscal Statement that he was overturning former Chancellor Kwasi Kwarteng’s proposals to remove the off-payroll working rules. The rules will now continue in operation.

2 April 2022

Background

Put simply, off-payroll working rules (formerly known as IR35) are designed to reduce tax avoidance by contractors who HMRC believe to be ‘disguised employees’.

These are people who work in a similar way to employees, but bill for their services via their limited companies or as self employed businesses. They do this in order to make their tax affairs as tax efficient as possible.

It used to be the responsibility of contractors to assess their own IR35 status. However, in April 2021, for those operating via a personal services company (PSC), this burden switched to the ‘end user’ client – if the client is a qualifying medium or larger business.

1. Being a ‘deemed employee’ doesn’t give you employment rights

By far the biggest misconception is that once a contractor is assessed to be ‘inside IR35’ and a ‘deemed employee’ this means the same thing as being a permanent employee. It does not.

While the client is now responsible for the contractor’s PAYE tax and NICs, the contractor is still viewed as working for that client through their own PSC and has none of the benefits a permanent employee has – such as paid holidays, paid sick days, pension and wrongful dismissal rights. So, a contractor will still need to continue to run their PSC and file annual accounts.

2. You may go on the payroll of an agency, not the end-user client

A contractor will not always go on the payroll of the end user client that makes the IR35 status determination.

If a contractor works for the end user client through an agency or an umbrella company, the contractor will go on the payroll of that third party.

In this scenario, contractors should be aware that their client is possibly more likely to determine they are inside IR35 because all payroll costs pass to the third party. At the same time, agencies should plan how they will meet those extra costs.

3. A deemed employee’s VAT responsibilities don’t change

If a contractor is assessed to be inside IR35 as a deemed employee, the contractor’s VAT responsibilities have not changed and remain exactly as they were before.

The contractor will still need to raise an invoice including VAT. The client will then deduct PAYE and NICs (net of the VAT) and make the appropriate payment, including the contractor’s VAT charge. The contractor will then make the correct VAT payment to HMRC.

4. Is Corporation Tax still applicable?

A contractor working inside IR35 for just one client does not have to continue paying corporation tax and tax on dividend payments because PAYE will already have been deducted from earnings.

However, to claim corporation tax exemption, the PSC must still file its accounts – including a corporation tax return that should indicate where PAYE has already been applied.

The rules around this area get more complicated if a contractor is working for one client inside IR35 and others outside IR35. Contractors (or their accountants) will need to calculate in their 2022 returns what proportion of their overall profits are exempt from corporation tax and what dividend payments are exempt from tax.

5. What if the client falls below the qualifying size criteria for the new rules?

The IR35 changes introduced this April don’t replace all the pre-existing rules in this area. So, for contractors working for clients that fall below the qualifying size of medium or larger organisations, or for self- employed clients, it’s still their responsibility to make their own status determination.

HMRC offers a Check Employment Status for Tax (CEST) tool to help determine the relationship between a contractor and a client at Check employment status for tax

HMRC ‘soft-landing’ period for penalties draws to an end

Prior to the introduction of the new rules, HMRC set out a briefing on 15 February 2021 outlining its proposed approach if it suspects non-compliance with the off-payroll working rules. This included a ‘soft-landing period’ for organisations for the first 12 months in applying the new rules.

During this time HMRC would not charge penalties for inaccuracies in the application of the rules unless there was evidence of deliberate non-compliance. This ‘soft-landing’ period ended on 6 April 2022 and means that, from this date, HMRC can charge penalties of up to 100% of the unpaid tax for inaccuracies made by an organisation in relation to the rules.

If you would like advice, please speak to your usual Shipleys contact or one of the specialists shown on this page.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary.

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