Off Payroll Working in the Private Sector from April 2020

In April 1999, Gordon Brown, as the then chancellor, introduced a new set of rules to try and prevent the avoidance of tax and national insurance contributions through the use of intermediaries, such as personal service companies (PSC).  The rules came to be known as IR35, and are still with us today.  The rules were designed to remove any tax advantages where an employee leaving work one day and turns up the next day carrying on the same duties, but charging his services through a PSC.

The IR35 rules apply when:

  • a worker provides their services to another person (the client);
  • the arrangements for these services are not made directly with the client but through a third party (the PSC);
  • if the arrangements had been with the client, not the PSC, the worker would have been treated as an employee of the client for tax and National Insurance purposes. These are referred to as ‘relevant engagements’.

If the rules apply, the payment from the client to the PSC is to be treated as employment income and subject to PAYE and national insurance.  The main problem that HMRC have is that they do not believe that the PSCs are operating the rules correctly. To tackle this issue, off-payroll working rules were introduced into the public sector from April 2017.  These rules are now being extended to the private sector from April 2020. 

HMRC proposes that the new rules will not apply to small companies. If two or more of the following conditions are met, the business will be considered to be small:

  1. Annual Turnover                        Not than £10.2 million
  2. Balance Sheet Total                  Not more than £5.1 million
  3. Number of employees               Not more than 50

Businesses will be required to make a determination of a worker’s employment status, and, where appropriate, make deductions for PAYE and NIC when making payments to the PSC. The worker will then be taxed on those amounts.

This will be a big change for contractors and others who are required to work via a PSC.  The status of the worker will be determined by the fee payer, instead of the worker, and in cases where the fee payer decides to deduct PAYE and NIC, any tax advantage of using a PSC will be removed. HMRC is clearly expecting fee payers to err on the side of caution, resulting in an additional £1.3 billion of tax collected by HMRC.

If you would like to discuss this blog in further detail please email Alex Gardner or call us on 01772 821 021.