The new off-payroll working rules came into effect today (6 April 2021), which sees a major shake-up in the requirements around contractors working in the private sector via a personal services company (PSCs). Many people will know this existing framework as IR35. The reforms to the regulations were initially delayed for a year because of the coronavirus pandemic.
What is changing?
The new rules shift the burden of responsibility for determining employment status from the contractor to the end client. Businesses receiving the personal services of an individual via their limited company or PSCs will need to decide whether the relationship is one of deemed employment (inside IR35) or genuine self-employment (outside IR35).
If the engagement falls inside IR35, then the contractor is taxed like an employee with income tax and employee national insurance deducted at source via PAYE. Payment of employer national insurance (and, if applicable, apprenticeship levy) will also be required.
Depending on the structure, either the end client or another third party will have responsibility for operating PAYE. Previously, all PAYE risk and responsibility of IR35 was borne solely by the individual’s PSC.
We have contractors working via a PSC – what should we do?
First, check whether the new rules apply to your business. It only applies to medium and large private sector end clients and also any company (regardless of size) connected with a public sector organisation. The rest of the public sector has been subject to these rules since April 2017. For small business in the private sector, the existing IR35 rules will continue to apply.
The next step is usually an audit of your labour supply chain to assess the scale of the potential impact of the rules. Which individuals directly or indirectly provide services via an intermediary, and are those services business critical?
Then, consider your overall approach. Is now the time to recalibrate your labour supply arrangements? As an alternative to engaging directly with the new rules, we have seen some end clients moving all contractors across to either direct or indirect employment, where payment is therefore subject to PAYE under normal principles. However, this approach has potential employment law implications and advice should be taken on that.
Others have decided to revise the terms on which they engage contractors via PSCs on a self-employed basis. An end client’s approach is often determined by commercial factors, such as the terms of any agreements that it has with its own clients. It is not unusual in certain sectors for the use of PSCs to be prohibited completely by an upstream agreement.
If you are within the scope of the new rules, and expect to receive a contractor’s personal services via a PSC, you will need to consider the following:
- Internal training – ensure the new rules are understood by those with responsibility for compliance.
- Contract review – amend and reissue contracts to allow for deductions via PAYE, payment dates/information and possible adjustments to gross fees to reflect additional cost overheads. Check if new contracts are necessary and whether using an outsourced PAYE/fee-payer service provider for affected contractors would help.
- New policies and procedures – end clients will need a process for documenting, arriving at and communicating status determinations and dealing with disputes on deemed employment status. End clients paying PSCs also need to consider the practicalities of payroll on boarding, as there are some quirks around dealing with VAT and payee identity.
- Agencies need to consider their upstream and downstream contracts and compliance processes, particularly if they have responsibility for operating PAYE. The key financial concern is often who picks up the cost of employer national insurance and the apprenticeship levy – the cost falls on the entity operating PAYE, and cannot be deducted from the payment made to the PSC in the same way as income tax and employee national insurance.
Clearly then, in some cases, a substantial overhaul of existing labour supply arrangements may be required. Businesses should consider this checklist sooner rather than later.
Lloyd Davey is a partner and Melanie Shone an associate at Stevens & Bolton