Off-payroll working, here we go again
From 6 April 2021 medium and large engagers in the private sector who use consultants and contractors will also have to follow the off-payroll working rules that have been in place for all public sector bodies, regardless of their size, since 6 April 2017.
The off-payroll rules in Chapter 10, Part 2 Income Tax (Earnings and Pensions) Act 2003 replace the current IR35 rules contained in Chapter 8 for those treated as “deemed employees”. Chapter 8 requires the intermediary (usually, but not exclusively a personal service company) to calculate if a deemed payment is appropriate for any engagements where IR35 would apply on which PAYE is due when compiling their accounts. Chapter 10 moves the assessment of employment status to the engager or client and requires them to withhold tax and NI from the consultant’s invoiced fees if their assessment is that the consultant has the hallmarks of employment if it were not for their intermediary (their personal service company or partnership).
Small private sector engagers
Any private sector incorporated engager who can meet two out of these three criteria for two successive accounting periods (measured at the reporting deadline) is classed as small from the start of the next tax year and is outside the rules:
- turnover not more than £10.2m
- balance sheet not more than £5.1m
- average number of employees not more than 50.
An unincorporated engager (charity, trade union) is classed as small for the next tax year if their turnover is not more £10.2m (for their financial year that ends at least nine months before start of that tax year).
A business is always classed as small for their first year less unless it is a public limited company which can never be classed as small. When a business is part of a group the measurements are taken at group level, rather than the individual subsidiary being considered separately.
Communicating engager size
One of the concerns from contractors about the legislation when it was due to take effect in April 2020 was that you could be left in the dark about the size of the private sector engager that you were planning to take a contract with. If you didn’t hear about your status from the engager was that because they were small and therefore you were going to be paid gross and you would continue to be responsible for operating the Chapter 8 rules, or that your status determination statement (SDS) had got lost in the post or even that they didn’t know the rules had changed?
This has now been addressed by giving the contractor the legislative permission to ask their engager what their size is, and the engager having a 45-day window to provide that information or risk being taken to court for an injunction that would force them to declare their size. A template letter for engagers to tell their contractors that they are small has been included at ESM10011B (see Follow up ).
Already on the payroll?
The off-payroll working rules do not apply where anyone in the supply chain employs the worker and is operating PAYE already. For example, this could be the case for a temporary worker supplied by an agency or where an umbrella company is operating PAYE on the wages that the worker pays themselves from their company.
It should not be the case that the umbrella company is passing on the employers’ NI to the worker; that cost should be borne by the umbrella company and recouped from the engager.
One of the key changes that HMRC has slipped into its guidance in the last six months is that it now wants engagers to get a starter checklist completed by anyone that it has found to be caught by the off-payroll working rules, so has been given an inside IR35 SDS. Only questions 1 to 8 on the front of the starter checklist (see Follow up ) should be completed by deemed employees. The student loan questions are irrelevant because student loan deductions are never operated by engagers on deemed employees, repayments are made through the personal service company’s payroll.
Deemed employees. It is likely that most deemed employees will tick statement C and therefore following the normal rules would be allocated tax code BR. If the deemed employee does not return the starter checklist, statement C should be ticked by the engager and tax code 0T/1 should be allocated.
The deemed employee is set up in exactly the same way as an actual employee but with the addition that the “off-payroll worker” (OPW) marker must be set. This was introduced in April 2020 and is currently only in use by public sector bodies for their deemed employees. Setting the marker ensures that HMRC does not send any student loan start notices to the engager in respect of the deemed employee.
Pro advice. If you accidentally set the OPW marker for an actual employee, simply remove it on the next FPS.
Pro advice. Setting the OPW marker will also, assuming your payroll software has decided to utilise this functionality, stop any pension assessment, ensure the individual cannot be paid any statutory payments and is not included in gender pay gap reporting.
One area of policy still being finalised is the calculation of statutory payments for deemed employees. As the engager is not responsible for the payments of either sick pay or family-related statutory payments, a difficulty arises because the NIable pay that would usually create the entitlement sits within the engager’s payroll system, not with the personal service company.
If a contractor who is pregnant wants to receive statutory maternity pay (SMP) they need to pay themselves on average at, or above, the lower earnings limit for the tax year concerned in the prior eight weeks to the qualifying week which is based on the expected date of childbirth. The problem is that when the contractor pays themselves from their personal service company, their wages will be tax and NI free up to the level that has already had NI withheld by the engager, so with no NIable pay there can be no SMP entitlement within the personal service company.
Discussions are ongoing with HMRC about a solution to this, which will probably involve the personal service company having to overwrite their average earnings in their payroll software with a notional figure when they pay themselves, that could then be used to generate an SMP entitlement. It is unlikely that withdrawing income from the company as a dividend will qualify. It will remain the case that monies must be withdrawn and reported under RTI to frank any entitlement to a statutory payment.
The key guidance that engagers should be relying on is the Employment Status Manual (ESM) (see Follow up ). This has now been updated with the latest legislative position from Finance Act 2020 which is the implementing legislation. Whilst there is significant guidance on GOV.UK for contractors, agencies and engagers, the ESM is by far the most detailed and technically robust.