Understand the changes to the off-payroll working rules (IR35) if you are a client receiving services from a worker through their intermediary.
On 6 April 2021, the laws governing off-payroll work changed and are now implemented differently. From this date forward, all public authorities and medium- and large-sized clients are responsible for determining a contractors working status.
To whom the regulations apply
Certain rules already apply to all public sector clients, but beginning on 6 April 2021, medium and large private sector clients must as well. Third-sector organisations, such as some charities, are included in the private sector.
All public sector clients and private sector businesses that meet two or more of the following conditions are subject to the rules: Your yearly revenue exceeds £10.2 million; your balance sheet total exceeds £5.1 million; you employ more than 50 people. This is consistent with the rules applicable to small businesses.
Certain clients are also subject to a simplified test that takes annual revenue into account. If your annual revenue exceeds £10.2 million and you are not a company, a limited liability partnership, an overseas company or an unregistered firm, you must comply with the requirements.
Additionally, there are rules that apply to connected and associated businesses. If a group’s parent is a medium or large business, its subsidiaries will likewise be subject to the off-payroll working requirements.
Private sector clients – when the rules apply
If you use the simplified test to establish your size, you must apply the criteria beginning with the start of the tax year following the calendar year in which the conditions were met.
If you do not use the simple test and do not meet the requirements, your situation may change later. If you then meet the criteria for two consecutive years, the date on which you must apply the regulations will change. You must apply the regulations beginning with the fiscal year that begins after the completion of the filing period for the second financial year in which you met the conditions.
What you need to do as a client
You must determine the employment status of each worker who works via their own intermediary, even if the person is provided by an agency.
Your determination should be communicated using a Status Determination Statement (SDS).
An SDS must be distributed to the worker and the person or organisation with whom you contract, and it must include your conclusion and the rationale for reaching it. When making a determination, you must exercise reasonable caution.
Additionally, you’ll need to:
- maintain detailed records of your employment status determinations, including the reasons for the determination and fees paid;
- establish procedures for resolving disagreements arising from your determination; and
- confirm the size of your organisation if asked by the person or organisation with whom you contract or the worker.
If you are also the fee-payer and the off-payroll working rules apply, you must deduct and pay Income Tax and National Insurance to HMRC.
To determine whether the off-payroll working regulations apply to you, you can utilise an IR35 test.
Small size Clients in the private sector
If you are a small private sector client, you will not be required to determine the employment status of your employees. This will continue to be the worker’s intermediary’s obligation (usually a limited company). However, you must confirm your size if the person or organisation with whom you contract or the worker requests it. This is to ensure that you, your agencies, and your employees are aware of the applicable requirements.
Making a determination with reasonable care
When determining a worker’s employment status, you must exercise reasonable care. Failure to do so will result in you being responsible for the worker’s income tax and national insurance contributions.
You must tell the worker and the agency, or other organisation you contract with, your determination. Do this whether your determination shows that the off-payroll working rules will apply or not.
Additionally, you must justify your decision. You are responsible for deducting and paying income tax and employee national insurance payments, as well as employer national insurance contributions, unless you inform the employee and the person or organisation with whom you contract of your determination and the reasons for it.
If the engagement’s working practises change or if you sign a new contract with the worker, you must ensure that the regulations continue to apply.
An engagement is a specific contract or assignment that a worker takes on. Whether off-payroll working regulations apply to a particular engagement is determined by the terms and conditions and working practises.
Off-payroll working regulations do not apply if your organisation is entirely located overseas. The worker’s intermediary (often a limited liability business) will determine whether the regulations apply. If your organisation does not have a connection to the United Kingdom, it is classified as overseas.
You will have a connection to the United Kingdom if you are either a resident of the country or have a permanent establishment in the country.
How to proceed if an employee or deemed employer contests your determination
A worker or deemed employer may object to your determination of employment status.
If this occurs, you will need to:
- consider the reasons for disagreement provided by the worker or agency paying their intermediary;
- decide whether to maintain the determination if you believe it is correct and explain why; or provide a new determination if you believe it was incorrect;
- maintain records of your determinations and the reasons for them, as well as records of representations made to you; and
- confirm the date your determination is valid from.
You may raise a disagreement with the worker until the final payment for the worker’s services is made.
You must respond within 45 days of obtaining notified that the worker or deemed employer objects to your assessment of employment status. You should continue to apply the regulations in accordance with your initial determination during this time.
After evaluating a point of contention
If your determination has not changed, you should inform the worker and the deemed employer that nothing has changed.
If you do not answer within 45 days, you will be responsible for the worker’s income tax and national insurance obligations.