Off-payroll working (IR35) – what are your obligations?
30th November 2023
Stephen Martin See profile
IR35 is a piece of legislation designed to close a loophole to prevent workers from setting up a Limited Company in order to pay less tax.
The specific mischief that the rules are designed to tackle are situations where an individual supplies services to a client via an intermediary (usually a Personal Service Company, known as a ‘PSC’) and, but for the existence of that intermediary, would be regarded by HMRC as an employee of the client.
The PSC will have the contract with the client and will invoice for services provided by an individual to that end client. As the PSC is not an employee of the client, it is paid gross (without deduction of any Income Tax or National Insurance). Typically, the individual supplier of the services will then draw money from the PSC, in the form of dividends, which are exempt from National Insurance and which attract a lower rate of Income Tax than employment income.
The rules operate to redress such situations by treating the individual as a ‘deemed employee’ of the client and requiring Income Tax and NIC (and any other relevant payroll deductions) to be deducted from any payments made.
Since April 2021, private companies that are not small have been required to assess whether the rules should apply to their suppliers operating through an intermediary such as a PSC. Before this, the burden had fallen on the intermediaries themselves.
A business is small where it breaches two of the following for two consecutive financial years:
- Annual turnover not exceeding £10.2 million
- Balance sheet gross assets not exceeding £5.1 million
- Average of fewer than 50 employees
This is the same criteria that dictates when an audit is required i.e. if the company is audited due to its size, IR35 obligations apply.
Not small? Here’s what you need to do:
You will have to decide whether the rules apply. To do so, you will need to assess the employment status of each worker engaged through an intermediary. There are certain factors to consider:
- Existence of mutuality of obligation
- Degree of control
- Right to provide a substitute work
- Financial risk
Each of these terms and their relevance to the employment status of an individual are outlined below.
A term used to describe a relationship that typically exists between an employer and an employee. If an individual is employed, the employer is obliged to provide work to the employee and the employee is obliged to accept work from the employer.
Typically if an individual is employed, their employer will generally have a large say or ‘control’ over how their work is done.
An employee will not be able to send a substitute to perform their duties.
An employee will generally not bear any financial risk of an engagement with a client – e.g. for defective work.
HMRC have released an online Check Employment Status for Tax (CEST) Tool which can be used to help do this.
Once you have decided if the worker should be treated as an employee or not, you will need to supply the worker and the organisation that you contract within the supply chain, with a Status Determination Statement (SDS), which explains why you reached your decision – not doing so results in the responsibility for the tax deduction to remain with you.
You must be able to demonstrate that you took reasonable care in fulfilling your obligations. Failure to do so will (again) result in the responsibility for the tax deduction remaining with you.
We can help you fully understand your obligations under these rules. We can assist you with carrying out the review process for all relevant engagements, help you prepare a report that documents your findings and decisions and aid you with the preparation and delivery of the SDS documents.
Our services include:
- conducting reviews of relevant engagements,
- preparing detailed reports documenting the findings,
- assisting in the preparation of SDS documents.