Off-Payroll Working Rules and IR35

On 6 April 2021, the off-payroll working rules (Rules) came into effect for medium and large organisations in the private sector. The Rules were due to take effect last year, however, their introduction was postponed due to the Covid-19 pandemic. The Rules have been in place for public sector companies for some time.

The changes were introduced to help tackle non-compliance with IR35. IR35 applies where a worker’s intermediary (most commonly a personal service company (PSC)) supplies the worker’s services to private sector clients. IR35 requires the intermediary to determine whether the worker would have been a deemed employee of the end-user client, but for the existence of the intermediary.

If the worker would have been deemed an employee, among other things, the intermediary must operate payroll, make deductions for income tax and employee’s NI contributions and pay employer’s NI contributions on the fees received for the services.

This requirement continues to apply to PSCs that supply a worker’s services to small private sector clients on or after 6 April 2021.

For medium and large organisations in the private sector, the Rules shift the compliance burden from the worker’s PSC to them, treating the client organisation as an employer for income tax and NICs purposes. This effectively places the tax responsibility on the end user, rather than the PSC.

If the Rules apply, the client is responsible for determining whether the worker would have been an employee of the client but for the existence of the intermediary. This is known as a status determination. The client and other entities in the contractual chain have various obligations depending on the outcome of the status determination and where the entity sits in the contractual chain, potentially making the financial and administrative implications enormous for organisations that operate a model that is reliant on ‘self-employed’ engagement through PSCs

The status determination test, which can be used under IR35 or the off-payroll working rules, while similar to the employment status test under employment legislation, is not exactly the same and is designed to provide status information for the purposes of tax only. There is a status checker on the government website to help with the determination (link at the end). 

The government website does state that HMRC will stand by the result you get from this tool. There is a rather large caveat however, that this will not be the case if the information provided is checked and found to be inaccurate. It also states: “HMRC will also not stand by results achieved through contrived arrangements, designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance, which can attract higher associated penalties.” This means that the answers provided must accurately reflect the relationship between the parties in practice, not just on paper.

Although the checker may also give companies some guidance regarding employment status, as stated above, the tests are not entirely the same. There have been cases that have been heard both by the tribunals under employment law, and in the civil courts under tax law, where an individual has been deemed to have a different status under the different legislation.

It is therefore imperative that organisations take employment specific advice on employment status if there is any uncertainty regarding the nature of the relationship. Failure to do so, could open employers up to substantial liabilities if employees pursue claims.

If you need advice on any of the key issues detailed here then please contact Employment and HR Partner, Amanda Badley, on 0116 402 9019 or email Amanda.Badley@bhwsolicitors.com.

https://www.gov.uk/guidance/check-employment-status-for-tax