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What is off payroll working?

The term off-payroll workers was coined by HMRC to refer to a cohort of workers who didn’t fit into the conventional categories of employed and self-employed.

Off-payroll workers are those workers at a company who are not on the PAYE payroll. They may be contractors, freelancers or consultants. In the medical sector, they may be locum workers or substitute teachers in the education sector.

How does off-payroll work?

The off-payroll working rules apply to contractors and their intermediaries. According to the HMRC, these off-payroll working rules may apply if a worker or contractor provides their services through their own limited company or another type of intermediary to the client.

What are the rules of off-payroll working?

The off-payroll working (OPW) rules ensure that any worker who provides services through their own personal service company (PSC) pay broadly the same tax and National Insurance as employees who are on the payroll. These rules are sometimes known as IR35 and are designed to combat tax avoidance by workers and the companies that hire them.

These are workers who are supplying their services to clients via an intermediary, such as a limited company, but who would be a payroll employee were an intermediary not used.

These workers are called ‘deemed employees’ by HMRC, and as a result, they need to pay tax and National Insurance at the same level as employees.

The original rules have been in force since April 2000 but were frequently criticised for being badly implemented and difficult to enforce. As a result, a new off payroll tax was introduced into the public sector in April 2017. These will be extended to the private sector from April 2021.

Genuine limited company contractors pay corporation tax on their profits at a flat rate of 19%.  They’re also able to treat their salaries as a deductible business expense. This means they can take a small salary and draw most of their income from their business in the form of dividends, reducing the amount of National Insurance contributions they are liable to pay.

Off-payroll working for public sector clients

From the 6th April 2017, the responsibility for determining the employment status of a contractor shifted from the individual being employed to the employer. If a particular contract is considered inside the IR35 rules, the party that pays the worker’s company has to deduct NI and PAYE from the payment that’s made to the PSC (Personal Services Company), through which the worker is contracted.

From April 2021, public sector employers will be required to provide a ‘status determination statement’ to both the contractor and the next party in the supply chain (e.g. a recruitment agency) who will then be required to pass this information on until it reaches the fee-payer.

The statement must include:

  • the status decision that was reached following due care and consideration
  • the reasoning behind the decision

If this requirement isn’t met the public sector organisation will be deemed the fee-payer and will be liable for any tax deductions.

Off payroll working for large or medium-sized private sector clients

From April 2021, the OPW rules that currently apply in the public sector will be rolled out to large and medium-sized companies in the private sector. This includes some third sector organisations such as charities.

The rules will be applied to private sector organisations that meet 2 of the following criteria:

  • the annual turnover is more than £10.2 million
  • the balance sheet total is more than £5.1 million
  • it has more than 50 employees

If these criteria are applicable to your business, you need to ensure you are aware of your responsibilities under the rule changes.

You can find out more about the OPW rules at the government website:

Rules for payroll working from April 2021

Off payroll working for smaller private sector clients

If your business does not meet 2 of the criteria laid out above for qualification as a ‘medium or large sized’ business, then it will continue to be exempt from the IR35 rules. This exemption does not apply to public sector organisations.

The government has included clauses in the legislation to ensure that medium and large-sized businesses are not able to set up arms-length companies or subsidiaries in order to contract services from PSCs. The criteria will be applied to the parent company, and the aggregate turnover, balance sheet and employee numbers of all the connected entities.

How do you check your employment status?

HMRC considers a number of factors when it comes to determining your employment status and liability for tax and NI. They will look at such issues as whether or not you are under the direct control of your client, whether or not a contract is repeatedly renewed creating a mutuality of obligation, do you use your own equipment or that belonging to your clients and who has the burden of financial risk.

If you have, in effect, become ‘part and parcel’ of your client’s organisation, you are likely to be deemed as employed. If you work for a number of clients, you’re more likely to be regarded as self-employed. They’ll also look for a range of other indicators that suggest you are a running a business on your own account. This might include whether or not you have a website, advertise your services or submit bids for contracts.

If all this seems confusing and you’re unsure where you fit in, the government have provided a tool on their website that allows you to check your own status, or that of someone whose services you are looking to employ:

Click here to check employment status for tax

For further information about off-payroll working, where you fit in and the expert umbrella solutions we offer for contractors and freelancers, get in touch with the friendly team at One Click Group today.

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IR35 cost

If you are outside IR35, you would typically take a small salary from your company which will allow you to benefit from statutory payments whilst minimising the amount of Employer’s and Employee’s National insurance and tax. The rest of the income you take from the company would be paid in the form of dividends which come out of the company’s post-tax profits.

The advantage of this is that dividends do not attract National Insurance and are taxed under the Corporation Tax regime.

If however you are caught by IR35 on an engagement then the majority of your income would be treated as “deemed salary” and subject to the same levels of taxation as a normal employee. There may still be some benefits of working via a limited company even if IR35 caught such as flat rate VAT and certain expense allowances but the financial advantages are less.

You can find more IR35 information here

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