What are the off-payroll working rules?
The 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 (for example, where ABC Charity pays Purple Limited, which is owned by Mr Purple, for Mr Purple’s work). Historically, responsibility for IR35 rules has fallen on the personal service company 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 2020, this responsibility will be expanded to cover many private sector charities and other organisations, as well as introducing new compliance requirements that will affect both public authorities and many other organisations.
Who is 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 2020 must comply with a new process as relayed later in this article.
2. Other large and medium size entities
An incorporated entity is large or medium if any two of the following apply:
- Annual turnover (excluding donations and voluntary income): more than £10.2m
- Balance sheet total: more than £5.1m
- Average number of employees: 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 £10.2m.
What are the new requirements?
Charities and organisations caught by the new rules must review each of their contracts to determine whether or not the IR35 rules apply. The charity must prepare a ‘Status Determination Statement’ (SDS) which explains the charity’s determination and the reason for that determination. The SDS must then be given to the worker and their personal service company (or if contracting with an agency, to that agency).
If the outcome of the SDS is that the IR35 rules apply, then the worker must go onto the charity’s payroll with tax and NICs deducted, before the net payment is made to the worker’s personal service company.
Depending on the contracts, it may be an agency in the chain which applies the payroll, but the charity must still issue an SDS and ultimate responsibility for the employment tax could fall back to the charity, if the agency does not properly administer the payroll.
The charity is also required to establish a disagreement process for any workers that wish to challenge the SDS they have been sent.