19 October 2022
UPDATE
Despite an initial proposal from former Chancellor Kwasi Kwarteng to repeal Off-payroll rules, his successor – Chancellor Jeremy Hunt – scrapped this in his fiscal statements on 17 October 2022.
A brief refresh on off-payroll working
The off-payroll working rules (often referred to as IR35) are designed to ensure that individuals working for a client in the same way as permanent employees but supplying their services through their own personal service company (PSC), pay broadly the same income tax and national insurance contributions (NICs) as individuals who are employed directly.
It used to be the responsibility of contractors and their PSCs to assess their own IR35 status and then to account for any tax and NICs due. However, in 2017, the balance began to change when that burden switched to the client in the public sector. Since 6 April this year, this shift in responsibility has also applied to medium and larger businesses in the private sector (and some charities).
The current rules
The current rules mean that such businesses will need to determine the employment status of contractors and then communicate this to them in a Status Determination Statement (SDS), giving the reasons for their conclusion.
If an individual is deemed to be operating ‘inside IR35’, he or she will be regarded as a client’s direct employee for income tax purposes, and the client, or ‘fee-payer’, will have to deduct tax and NICs under PAYE and pay employer’s NICs – accounting to HMRC through its own payroll.
The contractor and their PSC is responsible for workplace pension contributions, student loan repayments and holiday pay, but the client is responsible for any apprenticeship levy payments.
For corporation tax, the payment received from the client that represents deemed earnings is not required to be brought into account in calculating the profits of the PSC’s trade.
If a contractor works through an umbrella company – a third party operating between the contractor and the client – the contractor will be paid through the PAYE system by the umbrella company.
What’s next?
Businesses using contractors working inside IR35 should review the terms of all contracts for services affected to reflect the fact that they, as the client, will have to pay employer’s NIC. They will also need to justify the deduction of the tax and employees’ NICs to be accounted for on the deemed employment earnings.
Many businesses finding themselves impacted by IR35, but with uncertainty about some aspects of the new system, have simply opted at this stage to take contractors onto their payroll.
HMRC offers a Check Employment Status for Tax (CEST) tool to help determine the relationship between a contractor and a client.
We have also written this article about 5 common misunderstandings with IR35
If you would like advice or further information, please speak to your usual Shipleys contact. More on our website here: off payroll working article.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2022
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