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Off-payroll Working

Changes to IR35 due to affect workers' services provided through intermediaries (typically the worker's company) in the private sector, have been put on hold till 2021

18 March 2020

On 17 March 2020 the Chief Treasury Secretary Steve Barclay announced that the IR35 tax reforms would be pushed back by one year in response to the ongoing spread of Covid-19 and to help businesses and individuals.

He added, 

“This is a deferral and not a cancellation, and the Government remains committed to reintroducing this policy to ensure people working like employees, but through their own limited company, pay broadly the same amount of tax as those employed directly.”

The new tax regime applies to medium and large businesses that pay an intermediary for the services of a worker, who would have been an employee of the client but for the involvement of an intermediary in which the worker has a material interest.

This delay is welcome and will give both businesses and contractors greater time to prepare for the changes.

 

Background

IR35 changes were introduced in 6 April 2017 where the client was a public authority paying for a supply of services by an individual (who personally performs the services for the client through an intermediary). In the circumstances where the services were supplied directly by the worker, the worker would then be regarded as an employee for income tax purposes.

In this situation, the payment was to be treated as employment earnings, and the ‘fee-payer’ had to deduct tax and NIC under PAYE and pay employer’s NIC - accounting to HMRC with its own payroll. The employment allowance was not given against this NIC. 

 

Changes from April 2021

As it currently stands, from 6 April 2021, this obligation is extended to businesses that are not a public authority, unless they are small (see definition below).  We will of course be monitoring any developments and will update this page as new information is released by HMRC.

The new rules apply to payments made from 6 April 2021, save those in respect of services supplied before that date. This is until a status determination statement is delivered to the payee advising that they don’t.

However, this regime is not applicable to payments made by the fee-payer if the worker does not have a material interest in the intermediary supplying his services, or if any combination of the following factors applies:

  • The worker is not resident in the UK, is domiciled outside the UK or meets 'the requirement of S.26A'
  • The client is resident outside, or not resident in the UK
  • The services are provided outside the UK

 

Definitions under the new rules

S.26A ITEPA refers to an employee who was non-UK resident for the:

  • previous 3 tax years, or
  • 3 tax years before the previous tax year, or
  • 3 years before the previous two tax years, or
  • previous tax year, UK resident for the year before and non-resident for the 3 years before that.

 

A company or LLP (limited liability partnership) is small if it satisfies at least two of the following requirements:

  • Annual Turnover is not more that £10.2 million
  • Balance sheet total is not more than £5.1 million
  • Number of employees is not more than 50
  • If the company is a member of a group, the group must satisfy the tests.

A company is classified as small for a tax year, if it qualifies as small for its last financial year for which the filing date is before the beginning of the tax year. For example, if the company’s accounting date is 31 December and it qualifies as small in 2018, it is small for 2020/21 because the filing date for the accounts for calendar year 2018 falls before 6 April 2021.

 

Partnerships, Sole Traders and LLPs

A partnership or sole trader is ‘small’ if its turnover is not more than £10.2 million. These requirements are generally met on the basis of past results. A partnership is small for a tax year if its turnover in the last calendar year before the beginning of that tax year does not exceed £10.2 million.

An LLP is small for a tax year if its turnover in its last financial year ending at least 9 months before the beginning of that tax year does not exceed £10.2 million.

 

Implications from the changes

The terms of all contracts for services affected will have to be amended to reflect the fact that the client will have to meet the employer’s NIC. They will also need to justify the deduction of the tax and employees’ NIC to be accounted for on the deemed employment earnings.

For corporation tax, the payment received from the client that represents deemed earnings is not required to be brought into account in calculating the profits of the intermediary’s trade.

The intermediary will be responsible for workplace pension contributions and student loan repayments, but the client will be responsible for the apprenticeship levy.

To avoid a double charge to tax, a payment made by the intermediary (which can reasonably be taken to represent the payment made by the client for the worker’s services - this is termed ‘the end-of-line remuneration’) is reduced for tax purposes by the:

  • deemed earnings dealt with by the client
  • pension contributions made by the intermediary and
  • capital allowances.

 

Illustrating how it might operate if the existing rules for the public sector are adopted.

Adopting 2019/20 rates
Worker's deemed employment income £ £
Intended fee (for year)   100,000.00
Discount for employers' Class 1 NIC
13.8% of [£18,920 less £8,632]
[£100,000 less £8,632 = £91,368 x 13.8/113.8]
  11,080.00
Actual fee (ex VAT)   88,920.00
PAYE    
First £12,500 nil  
Next £37,500 @ 20% 7,500.00  
£38,920 @ 40% 15,568.00  
NIC (primary Class 1)    
First £8,632 nil  
Next £41,368 @ 12% 4,964.16  
£38,920 @ 2% 778.40 28,810.56
Net   60,109.14
Actual payment, including VAT @ 20% on £88,920
[£60,109.14 + £17,784 being 20% of £88,920]
77,893.14  
Intermediary    
Expenses, say 3,000.00  
Salary [or it could be dividend] (tax & NIC free because less than £88,920) 55,793.22  
Workplace Pension contribution (employer's)
3% of £50,000 less £6,136)
1,315.92 60,109.14

HMRC suggest that the intermediary's accounts may show its turnover either as (adopting the figures in the illustration above) £88,920 or £60,109.  It isn't clear what description should be used for the £28,811 if the gross figure in adopted.

This summary is based on draft clauses issued in July 2019.  The actual legislation to be included in the Finance Act may differ.  

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary, if you would like advice or further information, please speak to your usual Shipleys contact.

Copyright © Shipleys LLP 2020

For the latest guidance from HMRC see
https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-clients
https://www.gov.uk/guidance/fee-payer-responsibilities-under-the-off-payroll-working-rules

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