Employment Status and off payroll working

Employment Status

After a years delay – the new “off payroll” working rules came into force from 6 April 2021 and we are already seeing the impact on this as many companies address these new rules.  As we would expect, when the risk for non compliance is passed to the end of a supply chain, there is more pressure from the end customers of contractors to ensure that they are taxed as employees, higher up the supply chain.  Whilst HMRC have stated they will be applying a light touch to historic positions, we must expect (given these new tools at their disposal, and in light of non tax “employee vs self employed” legal decisions) that the question of whether an individual should be taxed as an employee or as self employed will become more relevant and important in the coming year.

Directors

Earnings from employment are classified as employment income and taxed under PAYE.  Employment income includes salary, wage or fee; any gratuity or other profit; or anything that constitutes an emolument from an office.  Company directors are office holders and so fees for acting as a director should always be paid under PAYE.

It may be that a director of a company may also  provide services in a separate capacity. For example, the individual could be carrying on an established business as a consultant whereby services are supplied to the company on terms similar to those given to other customers. In these cases the payment for the services would not automatically be treated as PAYE earnings and may, if the facts support it, be provided as a self employed contractor.

 

Off payroll working and IR35

Where a company of any size engages a self employed individual and pays him on invoice and not under PAYE, it is or the company to determine if the individual is in fact self-employed and should HMRC argue that in reality the relationship between company and worker is that of employment, the risk to make up underdeducted tax and national insurance lies with the company.

Until 5 April this year however, if the individual provided their services via an intermediary company (often their own PSC or personal service company), the tax/national insurance risk should HMRC argue that the company/individual relationship was in reality that of employer/employee rested with the individuals PSC – and if the personal services provided were akin to an employee it was for the PSC company to operate IR35.

For workers providing their services personally through a PSC, the rules changed from 6 April this year.

Off payroll working supply chain

Off-Payroll Working describe the situation where an individual worker provides their own personal services via a Personal Service Company (PSC), paid by a company (the fee payer) but with services provided to the end client.

The new rules from 6 April 2021 seek to address the situation if an individual is working in a way that mirrors that of an employee of the end client, and if this is the case, the off-payroll rules mean any payment to them made by the fee payer should be under PAYE tax and NIC tax deduction rules.

The off-payroll rules apply if the end-client is not a small company. A company is small if it satisfies 2 out of the following:

  • It has an annual turnover not exceeding £10.2m
  • It has a balance sheet total not more than £5.1m
  • It had an average of no more than 50 employees for the company’s financial year.

If the end client is a small company, the IR35 rules detailed above still apply, and it is for the PSC to assess the workers status and to decide whether to apply the IR35 rules or not.

If the end client is not a small company, then it is for the end client to assess the workers status and to deduct PAYE/NICs if they determine there is a deemed employment for tax purposes.

If a company of any size provides workers to another company, it is the size of your client, the end client that determines if the off-payroll rules apply or not and if the off-payrolling labour supply chain  looks something like this:

Worker > PSC > Your company > End-Client

It is also the responsibility of the end client to determine the employment status, even where it is your company (the fee payer) that is responsible for deducting PAYE.

The Off-payroll working rules do not apply if the worker's employment status determination (see https://www.gov.uk/guidance/check-employment-status-for-tax)   indicates that the worker would not be an employee of their End-Client if the status test is completed looking at a deemed situation if they were to work directly for that End-Client.

What this means in practice, and what we are seeing to date is that larger end clients using staff provided by  smaller companies are operating a risk averse approach and seeking confirmation from their suppliers that all individuals being provided are employees of the supplier  in order to avoid the need to consider the employment status of workers provided by 3rd parties and also the  risk HMRC pursuing them as end user for  potential PAYE non-compliance. 

If off payroll working rules apply

  • The end user determines employment status
  • The fee payer(deemed employer) operates PAYE/NICs.
  • The resulting net pay paid to the worker's PSC is treated as the worker's taxed employment income.
  • Any expenses that would be allowable had the worker actually been working for the End-Client are deductible from the PSC fee before PAYE and NICs.
  • The worker does not acquire any employment rights from anyone under these rules: it has no right to statutory sick pay, types of baby pay or employer-provided pensions.
  • The deemed employer is not required to account to HMRC for student loan deductions: this remains the duty of the worker.

Any business who uses and pays on invoice for individuals provided by a 3rd party needs to review their exposure under the new off payroll working rules.  Individuals should no longer see operating as a self employed contractor or as an employee as a choice, but should expect that the business providing their services will look at the employment status closely.  We can assist both users of contractors, and contractors themselves in negotiating these new rules.

Call our Tax Director Mary Tierney on 0345 330 3200 or email at mary.tierney@bennettbrooks.co.uk today for more information.