Are you ready for the changes to off-payroll working in the private sector?

17 March 2020

This legal update was originally published on 9 September 2019 and has been updated following the Government’s decision to delay the changes until 2021. On 17 March 2020, the Government announced that these measures will be delayed by a year, to 6 April 2021.

From 6 April 2020, the Government plans to change the rules widely known as 'IR35' as they apply to larger companies, shifting responsibility from the intermediary (e.g. a personal services company) to the 'fee-payer' (which will often be the client).

Although 'small companies' (defined as such by the legislation) will be exempt, large and medium-sized businesses will have to determine the employment status (for tax law purposes) of any off-payroll workers they engage and, if the IR35 rules apply, they will need to operate PAYE and pay National Insurance Contributions (NIC). These new private-sector rules mirror similar changes that have already been introduced to cover off-payroll working in the public sector, but which are still widely misunderstood.

To put this in historical context, during the nineties, the IR35 rules came in to counter tax avoidance through the use of companies. The Government was concerned that many of those individuals who were claiming to be self-employed were in actual fact employed (for tax law purposes), but were nevertheless able to hide or disguise their employment status by contracting through a personal services company.

The IR35 rules (until April 2020) deem the personal services company to be the employer of the individual contractor. They oblige the personal services company, as the deemed employer, to operate PAYE and pay NIC if the individual would be regarded as an employee of the client if the services been provided directly by the individual to the client. Since it is the intermediary that risks being treated as the (deemed) employer for the purposes of tax and PAYE, potential liability, in most situations, lay with the personal services company. Many clients therefore felt comfortable entering into arrangements with contractors who contracted with them via personal services companies.

The Government consider that there is widespread non-compliance with the existing rules, so, from April 2020, the rules are due to change. Under the new rules for engagements involving a large or medium sized client, the obligations to check employment status for tax, to operate PAYE and to pay NIC will shift from the personal services company to the fee-payer (normally the end client).

For further information or advice, or if you are interested in finding out more on the rules on working through intermediaries or personal services companies, Birketts' Employment and Tax specialists are available to assist. Please contact a member of our Employment team, or John Kahn on 01603 756520, or by email, [email protected].