Off-payroll working legislation - FAQs
The off-payroll working rules
Q: How do we determine whether we are a medium to large-sized company?
A: You are a medium or large-sized company if you meet two of the following criteria for two consecutive financial years:
A turnover of more than £10.2 million
A balance sheet total (assets) of more than £5.1 million
An average of more than 50 employees
Further guidance can be found here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10006.
Q: Do the off-payroll working rules apply to small company clients?
A: If a client is classified as small under the Companies Act 2006 and outside the public sector, they do not need to consider the off-payroll working rules. Instead, the interim’s personal service company (PSC) should self-assess their status for tax purposes.
Q: We are a small company, but we are part of a larger group, do the off-payroll working rules apply to us?
A: If you are a small subsidiary of a larger group, then it is the group as a whole that dictates whether you are classed as small or medium to large-sized.
Q: Does the off-payroll legislation affect charities?
A: Yes, from 6 April 21 the legislation will affect private sector and third sector organisations, which will include social housing organisations and some charities, depending on their size.
Q: Do the off-payroll working rules apply to self-employed sole traders?
A: If the individual does not work through an intermediary structure like a PSC then the rules don't need to be considered. The off-payroll rules only apply to interims providing their services to public sector organisations and medium/large non-public sector organisations through their own intermediary.
Q: If an interim contracts via an umbrella company, why does the legislation not apply?
A: If an interim contracts via an umbrella company, they are an employee of the umbrella company and their pay is treated as employment income and is subject to PAYE, so the umbrella company deducts tax and both employee and employer national insurance contributions from the interim’s pay and therefore off-payroll working rules do not apply to the assignment.
Q: What does a typical umbrella company charge for their service?
A: We have done some market research and on average, an umbrella will charge £90 a month for their services – or circa £4.40 a day if a full month is worked.
Q: Does including a statement of work in a contract mean the role will fall outside the off-payroll working legislation?
A: A statement of work does not put a contractor outside of IR35 – an interim engaged via a genuine statement of work arrangement is more likely to be outside IR35, but it is the nature of the arrangement which matters.
Q: I have secured a new role and the client has asked me to help them determine the status of the role - how should I do this?
A: If the client is a medium to large-sized organisation in the private sector, or is an organisation in the public sector, it is their responsibility to determine whether the off-payroll working rules apply. They must use reasonable care to come to the decision and produce a status determination statement (SDS) that must be issued to the interim and the agency confirming employment status.
Q: A client is using the 'blanket' approach to assess all temporary workers, is this ok?
A: Where a blanket determination has been made by a client without taking into account the terms and conditions or working practices of individual workers then this would be seen by HMRC, as making a decision without taking reasonable care. If the client has not taken reasonable care, the responsibility for the deduction of tax and NICs and payment of apprenticeship levy and paying these to HMRC is the client’s, if due.
Three key status tests
Q: What are the three key status tests?
A: Right of substitution, Supervision, direction or control and Mutuality of obligation.
Q: Does one have to meet all three criteria to fall within IR35 or just one or two of the criteria?
A: If all three key status tests are present, HMRC would consider you to be an employee as you are operating under the same conditions as an employee would and therefore the off-payroll working rules apply. If any one of them does not apply, you would technically be classed as self-employed. However, in order to be able to argue that a contract is definitely outside of IR35 it is best to have at least two out of the three key tests not present.
Q: I am the only employee of my personal service company; how can I provide a substitute?
A: It is the right of substitution that is important, not whether there is anyone waiting in the wings or whether there is anyone else working under your limited company. However, if a client has agreed there is a right of substitution, and should you then need one, you would need to find one at the time and you would be responsible for the worker and for paying them.
Q: If a limited company provides a substitute that is not an employee of their company and they use someone who is employed by a different limited company, is that not subcontracting, how are these different?
A: If you send someone in your place, to carry out your work, you are providing a substitute. Providing the client is happy to accept the substitute, it does not matter where you get them from. Sub-contracting is when a limited company is given ‘X’ amount of work and can pass part of that work on to other people to do that work, either alongside them or for them. Whereas a substitute would take the place of the worker initially provided by the personal service company.
Q: My contract gives me the right to send a substitute, but the client says they have the right to reject. How does this work?
A: Who the substitute is, is completely at the interim’s discretion, the client does not have a say in who is put forward, but they do have ultimate decision as to whether they accept the substitution. Where the client has a right to refuse a substitute, then this would mean the right of substitution would not be definitive, as there would not be an unfettered right of substitution. Further information can be found here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm11045.
Q: The right of substitution must not be unduly fettered. If the client requires a basic security check for anyone coming onto a site that could take a few days, would that be considered unduly fettered?
A: If the on-boarding process for a business to engage the services of the substitute takes more the 24-48 hours HMRC would consider this was unduly fettered.
IR35 assessment tools
Q: As the end client, how do I determine whether the off-payroll working rules apply to a role?
A: Tools that enable you to make the determination are the Check Employment Status for Tax (CEST) tool provided by HMRC: https://www.gov.uk/guidance/check-employment-status-for-tax, or alternatively there are many other private organisations offering IR35 assessment tools that will help you, or you may wish to take professional advice from your advisors. The use of CEST is not mandatory, you are free to use whichever method you wish, but reasonable care must be taken in all circumstances. You must be able to demonstrate how you arrived at your conclusion and show you considered all the relevant facts.
Q: Will HMRC stand by the result the CEST tool gives?
A: CEST is there to help the end client decide status, and HMRC will stand by the results as long as they reflect the facts. If the client put answers into CEST which are not based on true facts, HMRC will not stand by those results.
Q: Does the outcome of the CEST tool count as a Status Determination Statement (SDS)?
A: The CEST output will constitute a valid SDS, as long as accurate information has been entered into the tool. Any changes in contractual terms or the day to day working practices will result in the original SDS having to be revisited to ensure the answers provided are still accurate.
Q: What alternatives are there to using CEST?
A: There are many other private organisations offering IR35 assessment tools. We have found Qdos Contractor to be responsive and knowledgeable. Should you wish to use them during an assignment process with us, you can do so via our portal, with no financial benefit to Odgers Interim.
Status Determination Statement (SDS)
Q: What is a Status Determination Statement?
A: If a client is medium to large-sized in the private and third sector, or they are an organisation in the public sector, they must communicate whether the off-payroll working rules apply to a role using a Status Determination Statement (SDS). This must be passed to the worker and the person or organisation they contract with. It must give the conclusion and the reasons for coming to it.
Q: If the SDS is 'outside IR35' does it still need to be communicated?
A: The SDS should always be communicated as it will inform other parties in the contractual chain of the decision.
Q: What is the deadline for issuing the SDS?
A: The SDS must be produced and passed to the worker and any 3rd party the client contracts with on or before the date any payment has been made for their services.
Q: As a client, do we need to produce an SDS for each worker?
A: Employment status should be determined by considering the contractual terms and conditions as well as the day-to-day working realities. If ‘blanket’ determinations are made for groups of workers where the terms and conditions are not the same, this would not be taking reasonable care. If the client has not taken reasonable care, the responsibility for the deduction of tax and NICs and payment of apprenticeship levy and paying these to HMRC is the client’s, if due.
Q: As an interim, can I do anything if I do not agree with the SDS?
A: Changes in the legislation mean a worker is now able to dispute the SDS, and clients must have a status disagreement process in place to deal with any disputes. The client will have 45 calendar days to respond to any dispute. If the original conclusion is found to be wrong, they must produce a new SDS and inform the interim and agency. Failure to respond will result in the client being liable for tax and NICs, if due. HMRC advises clients to keep a record of their determinations and the reasons for them, as well as records of any disputes made to them. Further information can be found here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10015.
Deemed an employee for tax purposes
Q: What does ‘deemed an employee for tax purposes’ mean?
A: If the off-payroll working rules apply, the worker is ‘deemed an employee for tax purposes’.
Q: If I am ‘deemed an employee for tax purposes’, will I benefit from pension contributions and annual leave allowance?
A: If you are ‘deemed an employee for tax purposes’, it means you will pay the same tax as an employee, in the same way, but unfortunately you will not receive any of the benefits of being an employee. Employment status is only for tax purposes.
Q: If I am ‘deemed an employee for tax purposes’, what does this mean for my pay?
A: If you are ‘deemed an employee for tax purposes’, your pay will be taxed at source, as if you were an employee, and the fee payer will be responsible for the deduction of PAYE tax and NIC's. The personal service company will receive a similar fee to that which they would have received if they were an employee of the client and not providing their services via their own intermediary.
Q: What tax code or tax rate should the fee payer use to make deductions if the off-payroll working rules apply?
A: The fee payer will ask the worker to complete a starter checklist. A tax code will be provided based on the checklist response. HMRC may issue several tax code changes during the course of an assignment, depending on the workers circumstances and thresholds.
Q: If I am ‘deemed an employee for tax purposes’, should the fee payer pay me directly rather than paying my personal service company?
A: The fee payer must pay the personal service company, as this is the vehicle they have a contract with. The worker is still providing their services through their intermediary and so payment must be made to the respective business bank account.
Q: If tax is deducted in the form of PAYE and the balance is paid into my PSC, when I withdraw salary from my PSC, will I be taxed again?
A: If you only work inside IR35 during a tax year, with no income coming from anywhere else, what you are paid requires no further taxation from a corporation tax perspective or further PAYE tax and NI; you will have paid your taxes and NICs and will not be double taxed.
If you do multiple assignments during a tax year, remuneration can be drawn free of PAYE tax and NICs up to the level of the deemed direct payment, where that remuneration can reasonably be taken to be for services you provided to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation. Further guidance on this can be found here https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10030 and here https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10035.
Q: If my personal service company is VAT registered, does the fee payer have to treat this as taxable income?
A: No, VAT is not put through payroll, it is removed first, your pay is then subject to PAYE tax and NI and your VAT is paid on top of the net amount after deductions have been made.
Q: Do the off-payroll working rules apply to a worker who is not a UK tax resident but who is carrying out work in the UK for a UK client?
A: Where a non-UK resident worker is providing services in the UK, there is likely to still be a UK tax liability and the off-payroll rules need to be considered. For national insurance however, the worker may not be subject to UK national insurance for the first 52 weeks, or they have a certificate of continuing liability for another country in which case they are liable to pay social security contributions in their own country and not subject to UK national insurance.
However, residency is an incredibly complex area of tax, so if you need advice on it, we recommend you speak to a residency expert.
Q: Do the off-payroll working rules apply to services provided from the UK to an overseas company?
A: If the end client is based wholly overseas the off-payroll working rules do not apply and the end client does not need to determine IR35 status, it will be the personal service companies’ responsibility, as it has been previously.
Q: How do I determine if a client is wholly overseas?
A: For a client to be wholly overseas, they are not incorporated in the UK and there must be no UK connection before the start of the tax year. A permanent premises/connection/establishment is defined as 'a fixed place of business through which the business of an enterprise is wholly or partly carried on'. A permanent establishment can be anything from a branch, office, or factory in the UK to an entity who has authority to carry out business on behalf of the client. Further information can be found here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10025.
Q: Do the off-payroll working rules apply to services provided from the UK to an overseas subsidiary of a UK group?
A: Yes, the rules need to be considered. The residency of the UK company brings the whole group into scope of the rules, as they are not wholly overseas. If a client is based overseas but has a UK connection through a permanent establishment such as a branch, it is the overseas client who is responsible for discharging its responsibilities (such as issuing the SDS). If the overseas client does not meet its responsibilities it will, as a consequence, be liable for tax and NICs where the rules apply, and HMRC will pursue this debt through the UK permanent establishment.
Q: Do the off-payroll working rules apply to a UK resident, who is contracted to work overseas?
A: IR35 applies to the worker, so if the worker is a UK resident and therefore is subject to UK tax and NICs, regardless of where the services are provided or where the personal service company might be incorporated, the off-payroll working rules may apply. We would encourage you to seek residency experts for their advice and further information on this.
Q: Has HMRC indicated whether there will be a grace period?
A: Not as such, but they have said they will have a light touch approach to penalties for getting it wrong, unless they have evidence of deliberate non-compliance.
Q: Can HMRC look retrospectively at previous roles where an intermediary has not self-assessed their IR35 status?
A: HMRC has previously said they will not, and we have had no indication of HMRC going outside this, so we do not expect them to.