What is the IR35?
IR35 is a set of rules that make sure workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees.
The client is the organisation who is or will be receiving the services of a contractor.
How the off-payroll working rules are applied will change on 6 April 2021
Before 6 April 2021, if your worker provides services to a client through you in the:
- public sector, the client must decide your employment status
- private sector, you must decide your worker’s status
From 6 April 2021, all public sector clients and medium or large-sized private sector clients will be responsible for deciding your worker’s employment status. This includes some charities and third sector organisations.
Under the changes from 6 April 2021, responsibility for undertaking employment status assessments will become the responsibility of the entity using the services of the worker, whilst the responsibility for operating PAYE withholding will be that of the entity paying the personal service companies (PSC).
The changes to the off-payroll rules were due to come into effect on 6 April 2020. However, due to the effects of the coronavirus pandemic the changes were delayed until 6 April 2021. The delay is to help businesses and individuals deal with the economic impact of coronavirus.
What the changes mean
If your worker provides services to a public sector client, or a medium or large-sized private sector client, they:
- should get an employment status determination from the client, as well as the reasons behind that determination
- will be able to dispute the determination given to them if they disagree with it
Different rules apply if your worker:
- does not get an employment status determination from the client
- provides services to small clients in the private sector
If your worker does not get an employment status determination
This may be because they are providing services to a small-sized client in the private sector, as the rules are not changing for these clients. Your worker can ask for confirmation of the client’s size and the client will have 45 days to respond.
If the client confirms it is a small-sized organisation, the intermediary will be responsible for determining your worker’s status to see if the off-payroll working rules apply.
Your responsibilities from 6 April 2021
Income Tax and National Insurance
If your worker provides services to a small private or voluntary sector organisation and the off-payroll working rules apply, the worker’s intermediary will be responsible for deducting Income Tax and National Insurance contributions from your worker’s fees and paying them to HMRC.
The deemed employer will become responsible for deducting Income Tax and employee National Insurance contributions and paying them to HMRC, as well as paying employer National Insurance contributions and Apprenticeship Levy, if applicable, if both:
- a public authority, medium-sized or large-sized client makes the status determination
- the off-payroll working rules apply
Paying your worker
Your income for your worker’s services will have already had Income Tax and National Insurance contributions deducted from them if both:
- your worker provides services to a public authority or to a medium or large-sized private sector client
- the off-payroll working rules apply
This means that when you pay the worker, they do not need to pay Income Tax and National Insurance contributions again on those fees.
You can do this by either paying it as:
- a salary through your payroll – but do not deduct Income Tax or National Insurance contributions
- dividends – these do not need to be recorded on your worker’s Self-Assessment
As the amounts have already been treated as employment income doing it this way will avoid any double payment of Income Tax or National Insurance contributions.
What to do if your worker disagrees with the determination
The client must decide your worker’s employment status and if the off-payroll working rules apply. The client must then tell your worker their determination and the reasons for it.
If your worker disagrees, they’ll need to:
- give details of the employment status determination they disagree with
- give their reasons for disagreeing
- keep copies of any records about disagreements
A disagreement can be raised until the last payment is made for the worker’s services.
The client will have 45 days from the date of receiving the worker’s disagreement to respond. During that time the fee-payer should continue to apply the rules in line with the client’s original determination.
If the employment status determination has not changed, the client will have to tell your worker.
If the employment status determination has changed, the client will have to:
- give a new status determination to your worker
- confirm which date the determination is valid from