Off-payroll working (IR35) liabilities for medium and large companies

Are you affected by the changes to the rules?

Changes to the IR35 rules came into effect in April making medium and large companies responsible for accounting for a contractors’ tax and NI.

Where a contractor provides their services through a Personal Service Company (PSC), from 6 April 2021 it is the responsibility of all medium and large private companies to assess a contractor’s employment status for tax purposes, with significant liabilities and penalties for getting it wrong.

Previously these private companies could rely on the contractors’ own assessment of their employment status (i.e. employee or contractor). From April 6th it is the company’s responsibility to determine the status of their contractors.  This imminent change could result in a rather nasty surprise for companies using contractors, and others who they consider as ‘freelancers’ so ‘off payroll’.

What is a medium or large company?

Medium/large companies are those who exceed two or more of the following limit:

• Turnover of £10.2m
• Balance sheet total of £5.1m
• 50 employees

Small companies continue with the status quo for now and can make their own decisions about how to pay themselves.

So you are a medium or large company and you use a contractor – what now?

You are required to check the status of any contractors and whether they should be a ‘deemed employee’. HMRC provides an online assessment tool CEST that walks through various questions to help deliver an assessment.

Once you have come to a decision as to whether your contractor is a deemed employee or not you must provide a Status Determination Statement (SDS) to the company/agency with which you contract and to the contractor. You should state your decision and list the reasons for coming to that decision. Once the SDS is passed along (and if you found that the factors indicated employment) you are now responsible for deducting PAYE and NI from the payments you make for the contractor.

The contractor and intermediary can appeal your decision (with supporting evidence) in which case you have 45 days to review the evidence and your decision, and respond.

So what now?

We recommend considering your process for dealing with the IR35 legislation and prepare a plan with a clear timeline and responsibilities.

1. Identify which staff will monitor it and how often should it be revisited
2. What process will you have in place for new roles and new contractors?
3. Make a list of all contractors and any off-payroll workers you have already identified and perform the assessment (HMRC online CEST).
4. Complete and submit any SDSs that are required and prepare for any appeals.

Payroll Mechanics

If you have deemed employees, and do not convert them to full employment status, then you will need to operate PAYE & NIC each month on the payments to them.

The contractor may be submitting invoices which include VAT and expenses. You will still need to pay the VAT and account for the expenses as usual. But you will need to deduct the PAYE which you have calculated from the payment, and issue a payslip with the tax deductions.

You do not make deductions for pension contributions and are not liable for statutory sick pay, or other benefits. The payments are also excluded from the NIC employer allowance calculations.

You will need to ask the contractor to complete a PAYE Starter Checklist form and apply a Tax Code. If they do not tick a Box to enable you to issue the standard tax code you will need to allocate them Month 1 OT Basis.

Exemptions to IR35

If fraudulent information is given to you as the engager of a contractor then you will not be liable for a wrong decision.

Fully contracted-out services are exempt. For this to apply the service provided has to be fairly comprehensive, e.g. include supplies of goods, as well as labour, the service provider monitors the scope, quality and working hours of the service.

It is worth bearing in mind that if an umbrella company deducts PAYE and NI on their employees and becomes insolvent the liability can still come back on you.

The Next Steps in Summary

1. Check if they should have been an employee in the first place and so you are already potentially liable for PAYE.
2. Are you a large or medium sized business?
   1. If No you have no further liability.
   2. If YES review each contractor you use on a regular basis and determine if they are caught by the IR35 rules. Refer to the CEST tool for an assessment.
3. For those who are deemed employees issue an SDS and a Starter Checklist, set them up on payroll with effect from 1^st April 2021.
4. Ensure your accounting system can cover any changes to your processes.
5. Set a suitable timescale for a further review of all contractors.

If you would like advice on the application of the new rules, applying an assessment, and the payroll and accounting implications please contact us.

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