Update Yourself on New Off-Payroll (IR35) Rules


January 25, 2021

From April 2021 business in the UK that employs contractors through intermediaries should be preparing now for changes to the  New Off-Payroll Working (IR35) Rules. There was a lot of confusion and worry as to how IR35 rules would affect working.  It is tax legislation that was intended to target possible tax avoidance practised by those companies that hire contractors from limited companies. 

This phrase covers two legislations regarding intermediaries, namely Chapters 8 and 10 of the ITEPA introduced in April 2000 and 2017 respectively. The main reason for introducing the IR35 was to be a distinguishing factor between a new class of employees.

The concern here is not with regular employees but what has been classified to be deemed, employees. Originally this meant that the contractor would have to pay up both the employer’s as well as employee’s NIC from the contracted earnings. In a way, this would-be double taxation and it reduces the take-home pay considerably. Due to this contractor got the short end of the stick as they were in a twilight zone – they weren’t employees and hence, had no employee rights and yet they paid higher taxes than employees but minus all the benefits.

How To Determine The IR35 Status?

As strange as it may sound, the IR35 status determination relies heavily on tests of employment which aim to check whether one is dealing with an employee or a contractor. Of these parameters the three that have been considered to hold the most weight are as follows: (they are in form of questions)

  1. Substitution versus a personal service inclination - Can the contractor be easily substituted or was he or she specifically hired by the client?
  2. Degree of control – Is the contractor controlled by the client and to what degree in the parameters of what, where, when and of course, the most important in the list is ‘how’
  3. MOO – the Mutuality Of Obligation – Does the contractor simply have to accept whatever work has been offered and does the client have to ensure the continuity of the said work?

What Exactly Are Off-Payroll (IR35) Rules?

These rules basically apply to workers who are not employees and thus, not on payroll or ‘off-payroll’. The worker here is providing services to the client not directly but through a third party i.e., an intermediary. Also, the same holds true if the worker is functioning through their (the workers') own limited company.

Why Off-Payroll (IR35) Rules Were Introduced?

These rules were introduced basically to avoid tax evasion by workers who are not employees since they were more independent in how they provided services to the client.

When Do These Rules Apply?

The rules could apply to you if you fall into any one of the three stated below:

  1. A worker who is providing services through an intermediary like an umbrella company
  2. A client who is getting services from a worker who is not an employee of the company but functions through an intermediary
  3. An agency that functions like an umbrella company offering the services of workers through an intermediary organisation

What Effects Do They Have On Payroll?

The Off-Payroll Tax Is Here

Though the off-payroll tax was bundled under IR35, there are some salient differences to it; though deemed employment status validation, of course, is a moot point. Let’s have a quick brush of the changes:

  • IR35 status assessment – Per engagement of contractor the client is obliged to assess the status of the contractor
  • The tax collection point – Whoever pays the fee would have the added responsibility of calculating, processing and of course reporting the PAYE
  • Payment of the tax liability – Whoever pays the fee would also have to bear the employer NIC cost which was previously borne by the contractor. Plus, the Apprenticeship Levy also is another factor to consider
  • Proper assessment – If it is found that the assessment was not done with the right spirit then the client would have to become the fee-payer as this was part of the client’s responsibility

The Silver Fining for Contractors

Previously contractors had to pay both NIC contributions but now that the employer’s part has to be cleared by the client it has made things easier.

What the new changes mean for business owners(in this case)

New Responsibilities of Business Owners:

  • It is their responsibility to deduct (if fee payer) the correct tax by first assessing the status of a contractor
  • The client has to then inform the contractor about the said status and the tax treatment
  • If the client is acting as the fee-payer then the deduction of PAYE and NIC (employer’s NIC)
  • Check if they are under the ‘small company’ exemption and deal with any queries from the contractor or HMRC regarding the decided status

The effect of these changes on clients:

  • Costs will be fractionally higher as the employer’s NIC is ad addition to factor in when the client is the fee payer as well as the Apprenticeship Levy
  • The compliance as well as the additional administrative cost to has to be factored in – not to mention the time

Increased Compliance + Increased Cost = Increased Risk

Contractors have previously had problems in determining their IR35 status and in the right calculation of tax. However, now the onus is on the employer. Considering this, it does seem prudent for clients to consult experts for the same.

Doshi Outsourcing with over two decades of experience in accounting, bookkeeping, payroll and legal admin work, can come to your aid here. Not only do our experts speak your language and demystify things, but they also are available over the telephone for quick consultations Quality work delivered on time your business indeed will be in safe hands. You will no longer have to worry about getting the business part of things right. Thin compliance, think Doshi Outsourcing – your ideal partner for accounts outsourcing