IR35 rules affect those workers who provide a personal service to an end client via a company in which the worker has a material interest. Typically a worker has 100% ownership of their company, but these rules start to apply where a worker has a material interest of 5%.
The personal service company is called the intermediary.
Since April 2017, where the end client is in the public sector, the end client is the one responsible for assessing if the worker is a deemed employee and will be responsible for deducting PAYE and NIC before making payments to the worker.
Where the end client is in the private sector, the responsibility for assessing if the worker is a deemed employee rests with the intermediary.
The public sector includes government departments, executive agencies, local authorities, companies owned/ controlled by public sector, universities, parish councils, the National Health Service.
New rules from 6 April 2021
These new rules will roll out the rules that currently apply to the public sector to the private sector.
It will apply to all medium and large private sector organisations. But small private sector companies are exempt.
A small company is defined as meeting two of the following three conditions:
- Less than £10.2m of turnover
- Less than £5.1m of assets
- Less than 50 employees
However where a small company is a subsidiary in a medium or large group, it will not be exempt.
An unincorporated business is also small if its turnover is less than £10.2m.
The rules from 6 April 2021:
From 6 April 2021, medium and large private sector organisations will now be responsible for assessing if the workers they hire are in disguised employment i.e. if they should be taxed as employees rather than as self-employed.
If a worker is assessed to be a deemed employee, then PAYE and NICs must be deducted from payments made to the worker.
This applies to services provided by a worker through an intermediary (a personal service company) after 6 April 2021.
Small non-public sector companies are not responsible for assessing the tax status of workers they hire. This responsibility continues to lie with the intermediary (the personal service company).
Clients in both private and public sector will have to take reasonable care in issuing a status determination statement to the worker as well as to the agency they deal with directly. The status determination sets out, with reasons, whether the worker is in disguised employment or not. From 6 April 2020, every contract will have to be assessed.
Clients (both private and public sector) will have to set up a status disagreement process to deal with any disagreements on the status determination from the worker or the fee payer (the organisation in the contractual chain that makes payments to the worker).
Non-compliance by the client will result in the client being directly responsible for the PAYE and NIC on payments to workers.
There will be a legal obligation on clients to provide information, when requested, on their size to intermediaries and workers.
HMRC have indicated they will take a light touch approach to penalties.
Due to the impact of Covid -19, HMRC have announced that the roll out of the new rules will be deferred to
What do these changes mean to Contractors
From 6 April 2021, if you work through a personal service company for a client that is a medium or large organisation, then the client will assess whether you are a deemed employee or not.
This applies to all contracts that you have.
If you are assessed to be a deemed employee then the client will deduct any PAYE/NIC from before making any payments to you.
If you are not assessed to be a deemed employee, then your personal service company remain responsible for paying any tax due.
If the client is a small organisation in the private sector (defined above), then your personal service company remains responsible for paying any tax due.
If you have any queries or would like advice, please contact Clayton Accountants.