Off-payroll working in a nutshell
Off-payroll working essentially refers to any relationship between a worker and a client other than employment. Most often, this involves an intermediary between the worker and the client/end user.
There are a variety of indirect and third-party relationships where the work is not carried out by an employee of the client/end user of the services. These can be complex in terms of PAYE treatment (tax and NIC) and other payroll costs, such as the apprenticeship levy, as relevant. Where PAYE is applicable, the apprenticeship levy will usually also apply.
What does off-payroll working look like?
The most well-known example of off-payroll working is that of a worker with their own personal service company (PSC). They are the sole director and shareholder of that PSC and the PSC has a contract to provide services to the client. The worker therefore has no direct contractual relationship with the client. The specific rules applying in this case are known as IR35.
Other examples include working through an agency, an umbrella company or as a sole trader (this is where the individual is self-employed, and the business does not have its own separate legal entity). Managed service companies (MSCs) and CIS (Construction Industry Scheme) may also be considered alongside these topics.
What is an intermediary?
Where there is a person, organisation or business in the supply chain between the worker and the client, this is known as an intermediary. A PSC is therefore an intermediary. Other common intermediaries include employment agencies and umbrella companies.
What are the rules that need to be considered with off-payroll working?
There are a number of different sets of legislative rules that need to be considered with third party relationships. When assessing whether there is a liability for PAYE, it can be difficult to know where to start.
The rules to be applied are set out below. They are in order so that the first to appear in this list applies to the engagement in question:
- workers supplied by agencies
- non-resident entertainers and sportspeople. Further detail on this highly technical subject is available in Simon’s Taxes E5.8
- off payroll working (IR35) in the public sector
- off payroll working (IR35) in the private sector from 6 April 2021 (these are in fact the same rules as for the public sector with an expanded definition of where the rules apply)
- managed service companies (MSCs)
- off payroll working (IR35)
- construction industry scheme (CIS)
What is IR35?
The IR35 rules ensure that tax and NIC similar to that paid by an employee are paid where:
- an individual provides services to a client through an intermediary, and
- the relationship between the worker and client would have been one of employment if the intermediary were not in the supply chain
The second bullet point above refers to employment status (being whether an individual is employed or self-employed). This is complex to assess, and the rules have been developed through case law. Essentially, they assess whether the intermediary is running a business in its own account or not. The rules are applied on a contract by contract basis, i.e. not to the intermediary as a whole or to the worker as a whole.
Where the rules apply, payments and benefits received by the worker (where not already received as salary subject to PAYE), are deemed to be employment income. The intermediary calculates an amount of 'deemed employment income' and deducts tax and NIC on that amount, essentially mimicking PAYE.
Workers supplied by agencies
The agency rules apply so that PAYE is due where certain criteria are met. These are as follows:
- an individual is providing their personal services
- there is a contract between the end user of the services and a person other than the individual worker for the provision of services, eg a contract between an agency and a client, and
- the individual is subject to, or to the right of, supervision, direction or control. It is presumed that this is the case unless it can be shown otherwise
The PAYE liability sits with the person who makes the payment to the individual worker. This means that even where an individual may consider themselves to be self-employed, the person paying them is required to operate PAYE because the supervision, direction or control criteria is met.
Employment businesses may have complex supply chains which need to be understood in order to understand how the legislation applies and who has liability for PAYE.
Off payroll working (IR35) in the public sector and private sector
The main effect of these rules is to apply the IR35 rules, but move the responsibility for operating PAYE from the intermediary paying the individual (eg the PSC paying its director / shareholder) to the person paying the intermediary (eg the end client contracting with the PSC), known as the ‘fee payer’.
- an individual is providing their services through an intermediary
- looking at the relationship between the individual and client, without the intermediary, the individual would be an employee of the client, and
- the end user client is a public sector organisation (from 6 April 2017 onwards) or a large or medium sized private sector organisation (from 6 April 2021 onwards)
A large or medium-sized organisation is defined as ‘not small’. The definition of small is complex; however, in summary:
- a corporate body will always be small for its first year of operation
- a corporate body will be small if it meets two of the following three criteria:
- turnover of £10.2 million or less
- balance sheet of £5.1 million or less
- 50 employees or less
- any other undertaking or person (essentially not a corporate body) need only meet the requirement of turnover being £10.2 million or less
There are specific requirements in relation to communication in the supply chain for these rules as well as the responsibility for applying tax and NIC.
Managed service companies
Managed service companies (MSCs) are generally limited companies. They are, essentially, a variation on a PSC. An MSC is set up by a ‘managed service company provider’ providing the services of an individual to an end client. The provider’s business will be to set up the company and undertake the company administration.
Where these rules apply, the MSC is required to operate PAYE on all payments made to the individual worker and the profit cannot therefore be extracted in other forms such as dividends.
Construction industry scheme
CIS requires withholding of tax at source at the point of payment. Tax is deducted at various rates. The rate is zero for those with gross payment status (which is most often given to larger companies). Payments made are recorded and reported to HMRC on a monthly basis. The rules can be applied to any person from a large company to an individual. Where they apply to an individual, they apply only to those who are self-employed as employees will be paid under PAYE.
There are complex rules around which contracts these will apply to, but it is broadly those providing ‘construction operations’.