New off-payroll working rules (IR35) starting from April 2021 – are you prepared?

What are the off-payroll working rules?

The existing off-payroll working rules (commonly known as IR35) were designed to stop the avoidance of payroll taxes where a client pays a worker via the worker’s personal service company (PSC). For example, where ABC organisation pays Blue Limited, which is owned by Mr Blue, for Mr Blue’s work. Historically, responsibility for IR35 rules has fallen on the PSC and not the client.

In 2017, new rules were introduced that affected organisations meeting the definition of ‘public authorities’. These public authorities were required to assess whether their contracts fall under the IR35 rules, and implement payroll deductions where the rules apply.

With effect from April 2021, these rules will be extended to cover many private sector business, charities and other public authority organisations, as well as introduce new compliance requirements.

Is your organisation affected by the new changes?

There are two types of organisation affected by the new rules:

1. Public authorities

A public authority is any entity that is defined as such under the Freedom of Information Act 2000. This includes various bodies connected with local government, the NHS, education services and the police.

Public authorities (whether large, medium or small entities) are already required (since 2017) to operate payroll for any workers caught by the IR35 rules, but from April 2021 they must comply with a new process as relayed later in this article.

Following the latest government guidelines, from 11 May 2020, public authorities will also be required to start using the new PAYE RTI 'off-payroll worker subject to the rules' indicator in payrolling software.

2. Other large and medium size entities

The change in rules will affect you if you’re a medium or large organisation. Your entity falls within those categories if any two of the following apply:

• Your annual turnover (excluding donations and voluntary income) is more than £10.2m

• Your balance sheet total is more than £5.1m

• Your average number of your employees is more than 50

An unincorporated entity (such as a charitable trust) is medium or large if its annual turnover (excluding donations and voluntary income) exceeds £10.2 million.

If your organisation doesn’t meet this criteria, the responsibility for IR35 remains with the PSC.

Employment status under new off-payroll working rules is determined by a wide range of factors such as control, substitution, integration and financial risk. There’s often not a clear answer to whether a worker falls within the new off-payroll working rules. A useful starting point would be to use HMRC’s online Check Employment Status for Tax (CEST) tool, in preparation for the new rules. However, this tool is not definitive, and you may need to seek further professional advice if you have queries about specific contracts.

What are the new IR35 requirements?

If your organisation meets the new rules you must:

• Review each of your contracts to determine whether or not the IR35 rules apply.
• Prepare a Status Determination Statement (SDS) which explains your organisation’s determination and the reason for that determination.
• Give the SDS to your worker and their PSC (or if contracting with an agency, to that agency).

If the outcome of the SDS is that the new off-payroll working rules apply, then the worker must be enrolled on your organisation’s payroll with tax and NICs deducted, before the net payment is made to the worker’s PSC.

Depending on the contracts, it may be an agency in the chain which applies the payroll, but the organisation must still issue an SDS, and ultimate responsibility for the employment tax could fall back to you if the agency doesn’t properly administer the payroll.

You are also required to establish a disagreement process for any workers that wish to challenge the SDS they have been sent.

International considerations

Review of the specific circumstances is advised, as overseas organisations with a UK permanent establishment could have obligations under the new rules. However, wholly overseas organisations with no UK presence don’t have to consider these rules.

What action should you take before April 2021?

You should take action now before the rules come into place. We recommend carrying out the following steps:

• Establish a policy and process for reviewing contracts under IR35 rules and issuing the SDS to your workers.
• Carry out a preliminary review of all existing contracts that are expected to be ongoing in April 2021.
• Ensure that your payroll system is ready to implement the new off-payroll working rules.

Additional advice and support

We have both tax and HR experts who work across charities and businesses who can help you structure your arrangements and ensure your organisation is compliant.

Charity Tax

HR advice for charities

Business tax

HR advice for businesses

Leave an enquiry 

If you have any concerns about the new off-payroll working (IR35) rules and your engagements with contractors, or more broadly regarding wider payroll compliance, please get in touch by completing the form below.