The government decided that the reform of the off-payroll rules would be introduced for private sector assignments from 6th April 2021.
The April 2021 reform uses the off-payroll working rules currently in place for the public sector as a starting point and is seeking to ensure the rules are applied across both the public and private sector.
This means an end-client will be responsible for determining the employment status of the contracts it enters into with personal service companies. In addition, the fee payer, usually the organisation paying the personal service company) will need to pay deductions for income tax and National Insurance Contributions and pay any Employers NIC.
A summary of the new rules which will apply to private sector assignments is detailed below:
The following changes that the government has implemented equally applies to engagements in the public sector from April 2021:
Exemption for small companies
The new rules will not apply to small companies (end clients) as defined by the Companies Act:
If an end client satisfies two of the above requirements, then the off-payroll rules will not apply.
In this case, the personal service company will remain responsible for determining the IR35 status of its contracts with an end client.
Where the end client is not a limited company (unincorporated entity), the reform applies to:
Therefore, the reform will apply in full to public authorities and any private sector company end clients who do not meet the small company criteria.
The government believes information should be shared seamlessly across the labour supply chain.
The intention is for the end client to provide an employment status determination (and the reasons behind their decision) to the PSC directly, together with the party they contract with (for example, their agency) for each engagement.
There is a requirement that all recipients of the determination should pass them on to the next person in the contractual chain at, or before, the time they make the first corresponding payment – this is important, as this ensures all parties to the labour chain have all the information to comply with the rules.
The fee-payer will be responsible for deducting any income tax and National Insurance from any amounts payable to the PSC - thereby acting as a collector of these taxes for HMRC, which they are then obliged to pay over to them. Where HMRC does not receive the tax due, the government proposes that the liability should initially rest with the party that has failed to implement the new rules. For example, if an agency in the labour supply chain failed to send the employment status determination to the worker, the agency (as fee payer) would be liable for any income tax and NICs due. Similarly, if a fee-payer, having received the determination failed to make deductions from any payments made to the worker’s personal service company, then it would become liable.
The government does not believe there is any evidence from the introduction of new rules in the public sector of a blanket assessment of employment status being inside IR35 rules. The government believes that requiring the end client to provide the off-payroll worker and the fee-payer with the reasons for the employment status determination, will reduce the scope for any blanket assessments to be completed.
Where there are status disagreements between the end client and the PSC regarding the status determination, the first step is to seek the reasons for the status determination from the end client.
The government advises that clients introduce a client-led status appeals process –as minimum, there should be a process to include the consideration of evidence put forward by the fee-payer or the PSC, advising the outcome of that consideration and the reasons for that outcome. This is the second step as part of the disagreement process.
The government is proposing an appeals process led by the end client to address any disagreements and to evidence that reasonable care has been taken in arriving at an employment status decision.
This aspect of the end client “taking reasonable care” is important, as where reasonable care has not been undertaken by the end client in the decision making process, the liability for income tax and National Insurance can be transferred to them.
The government is currently looking at enhancing the service so that customers can receive robust employment decisions and benefit from guidance by using the online CEST tool to enable those working through personal service companies to assess and understand their employment status.
The fee-payer must make appropriate deductions for all employment taxes (income tax, NICs, and the Apprenticeship Levy) in the same way as for an employee. The off-payroll worker is legally required to provide their National Insurance Number, tax code and identity details to enable the right tax to be deducted. The fee-payer will not be required to make deductions for student loan purposes.
To reiterate, the amount that the PSC will receive is the VAT element of the sales invoice raised in the PSC, plus the net amount of the invoice less any deductions for income tax and Employee’s National Insurance. The fee payer bears the cost of the Employers National Insurance.
As with public sector engagements, a personal service company will no longer be permitted to deduct a 5% allowance for expenses in relation to engagements with medium and large-sized clients.
