OFF-PAYROLL WORKING (IR35)
The IR35 tax rules (also known off-payroll working) currently apply only to public authorities, but were going to be extended to much of the private sector (including some charities and other voluntary sector organisations) from 6 April 2020. But with businesses and organisations facing the pressures and economic consequences of coronavirus, the government unexpectedly announced last night (17 March) that the extension would be deferred for a year, until 6 April 2021.
Since April 2017, public sector bodies (the client, also referred to as the end user, and called the engager in the legislation) have been responsible for operating PAYE for some individual contractors who carry out work for the public sector body. From the new date of 6 April 2021, private sector businesses and organisations, including charities, will also have this obligation – but only if (and these are big only’s):
- the business or organisation is not small as defined below; and
- the individual contractor does the work through an intermediary, usually the worker’s own personal service company (PSC), rather than as a self-employed individual – so the client’s contract is with the intermediary rather than the individual; and
- the relationship between the client and individual is not what HMRC describes as disguised employment. Disguised employment is where the individual does so much work for the client, and/or the work is so much under the client’s control, that if the individual were not working through their PSC they would legally be considered a direct employee of the client for tax purposes.
IR35 makes the client responsible for carrying out a status determination to determine whether its relationship with the client is really disguised employment. The client must provide its status determination statement (SDS) to the individual, and provide time for them to challenge the determination. If the final determination is that the individual should be treated as an employee for tax purposes, the client becomes responsible for paying tax and class 1 national insurance (employee’s NI) through its payroll, and deducting those amounts from its payments to the PSC. If the client’s total annual salary bill is more than £3 million, it will also have to pay secondary class 1 (employer’s) NI, and 0.5% apprenticeship levy.
The arrangements are different if the client contracts with an agency, and the agency contracts with the PSC.
Definition of small
When these off-payroll working rules come into effect for the private sector, they will not apply to small businesses and organisations – so will not affect the vast majority of charities and other voluntary organisations.
For the purposes of IR35, small companies and other incorporated bodies are defined as in the Companies Act 2006, as meeting two or all three of the following three criteria:
- annual turnover not exceeding £10.2 million. Turnover does not include donations and other voluntary (non-trading) income which does not derive from the provision of goods and services;
- balance sheet total not exceeding £5.1 million;
- average number of employees over the year not more than 50.
For the purposes of IR35, an unincorporated business or organisation is defined as small if it meets at least one of the above tests over two accounting periods. This is called the simplified test, and will be used for unincorporated charities and other voluntary organisations, and charitable trusts.
A business or organisation that does not meet one of the above definitions of small will be subject to the off-payroll working rules.
In relation to company groups, if the parent is medium or large its subsidiaries, even if they are small, will have to apply the off-payroll working rules.
Looking ahead to 2021
The government consulted in spring 2019 on its proposed plans for the extension of IR35 to the private sector. Following this, HMRC agreed it would not impose penalties for inaccuracies in the first year, unless there has been deliberate non-compliance. It also agreed that the new rules would apply only to work carried out on or after 6 April 2020 [which will now be 6 April 2021], rather than also to payment made by the client after that date for work carried out earlier.
If your organisation is not “small” as defined above, and has individual contractors who are or might be working through PSCs, it should already have determined those individuals’ employment status and issued status determination statements, preparatory to IR35 coming into effect on 6 April this year. If it hasn’t done the determinations, there’s now a reprieve. But the government has emphasised that this is a deferment, not a cancellation. We all have more important issues on our minds at the moment. But if your organisation might be caught by IR35, put on your to do list for after the coronavirus crisis to check whether IR35 will indeed be extended to the private sector in 2021. If it will, br sure to allow enough time for the determination process, which can be complex and lengthy, especially if the individual challenges the determination.
Employment status for tax versus employment status for employment rights
It is important to understand that tax law definitions of employment status overlap with, but are different from, definitions for the purposes of employment rights such as anti-discrimination, sickness and parental pay, redundancy rights, unfair dismissal rights etc.
Tax law has two basic categories: employees and self-employed. Employees are taxed through PAYE. Self-employed individuals are taxed as individuals through self-assessment. If a self-employed individual sets up a PSC this is at present advantageous for both clients and individuals. The client enters into a contract with the PSC, pays the PSC as an intermediary, and has no responsibility for the individual’s tax or national insurance. The PSC then pays the individual as an employee or director and operates PAYE, and the individual may also, as a company shareholder, receive dividends from the PSC’s profits, which are taxed differently from salary or income earned from self-employment.
Employment law has three basic categories: employees, workers and self-employed. Employees are entitled to all employment rights (subject to any requirements such as length of service). Workers such as casuals are entitled to anti-discrimination protection and some employment rights, including national minimum wage and working time rights (holiday pay, rest breaks), but not most other employment rights. Self-employed people are protected by anti-discrimination legislation but have no rights under employment law.
The same individual, doing the same work with the same arrangements for the same organisation, could be in one category for tax purposes, and another for the purpose of employment rights. IR35 may require a client organisation to operate PAYE and treat someone as an employee for tax purposes, but this does not mean that the person meets the employment law criteria for being an employee of the client and qualifying for the full range of employment rights.
Some of the very many cases currently wending their way through UK and European courts, involving couriers, Uber drivers and others in the “gig economy”, are about their employment law status; others are about the tax status. There are as yet no clear, final outcomes.
The above is a very brief summary of the fairly complex IR35 legislation. No one can possibly predict what the situation will be in a year’s time, but the government has explicitly stated that this is a deferment, not a cancellation. So if you want more information now, I suggest these.
- Charity Tax Group as the best source of information now and in future. Search for Off-payroll working at:
- Understanding off-payroll working (IR35). HMRC guidance, with links to related content and detailed guidance.
- IR35: What does you organisation need to know? Bates Wells solicitors, 5 February 2020. Good summary of the changes and how to prepare:
- IR35 reforms from April 2020. Lewis Silkin solicitors, 12 February 2020. More detailed than the above article: