Off-payroll working rules apply where workers provide their services through an intermediary but would be classed as an employee if they were contracted directly.
These have been introduced to ensure that workers providing services through an intermediary pay broadly the same tax and National Insurance contributions (NICs) as an employee.
The changes already apply in the public sector, but from 6 April 2020 they are being extended to medium or large-sized private sector clients who take on workers via intermediaries, including some charities and third sector organisations.
An intermediary will normally be a worker’s personal service company (PSC), but could also be a partnership, a managed service company, or another person.
Up until April 2020, intermediaries decide their own status for private sector engagements. After that date, it will become the responsibility of the company for which they supply services to provide them with an employment status determination, together with the reasons for that determination.
The only exception is small companies, where the intermediary will continue to decide on employment status. Intermediaries will also need to determine whether the off-payroll working rules apply if they do not receive a status determination from the client. Company size will be determined under the existing definition in the Companies Act, with similar rules intended to be applied to unincorporated organisations.
Intermediaries who decide the rules apply to them will become responsible for deducting tax and National Insurance contributions (NICs) from their fees and paying these to HMRC.
Deemed Employer (Fee Payer)
The client (end user) will need to pass the worker’s employment status determination to the agency or other organisation they contract with. The determination must be passed on, until it reaches the party immediately above the worker’s intermediary. This party is known as the deemed employer being the one who ultimately pays the fees to the intermediary.
Where the rules apply, the deemed employer is then responsible for deducting the tax and NICs and paying these to HMRC. This is because the deemed employer is the lowest party in the labour supply chain and in most cases, the organisation paying a worker’s intermediary company.
This only applies to deemed employers resident in the UK, or who have a place of business in the UK engaging UK resident workers. (The rules on UK tax residence can be complex so proper consideration needs to be given to this matter where there may be some uncertainty).
Also the intermediary company must not be controlled, or the material interest not held, by either a worker, alone or with one or more associates of a worker, or an associate of a worker, with or without other associates so this almost certainly prevents a group of contractors or consultants forming their own company and providing’ substitute’ to the end user. Material interest is 5% or more, so to avoid this, it would mean an intermediary company having more than 20 contractors as shareholders.
Deemed employers will receive the worker’s employment status determination. If the off-payroll working rules apply, deemed employers must calculate the employment taxes and NICs on the deemed payment arising from the contract. Once this has been done, it is necessary for the deemed employer to deduct tax and primary NICs from the payment to a worker’s intermediary. This will be applied as part of the normal PAYE process with the fee payer also having to account for employer NICs, and submit the relevant Real Time Information (RTI) reports. Where appropriate it will also be necessary to apply the apprenticeship levy and make any payments necessary to HMRC
What is the deemed direct payment?
This is the amount paid to the worker’s intermediary that must be treated as earnings for the purposes of the off-payroll rules.
This is calculated based on the value of the payment to the worker’s intermediary, having deducted VAT if applicable, plus the direct costs of materials that have, or will be, used in providing the services. Any expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed should also be taken into account.
It is unlikely that the temporary workplace rules will enable travel and subsistence costs to be claimed. This is because in these types of situations, the engagement will be regarded as a separate permanent employment for the purposes of travel and subsistence expenses. As each will be a permanent workplace, it means that intermediaries cannot claim expenses for travel and subsistence if they regularly commute from home to a workplace for an off-payroll engagement.
When reporting the pay and deductions, companies will need to indicate if someone is an off-payroll worker. They can be added to an existing payroll, although this is not a requirement. Any errors can be corrected via RTI in the same way as for other employees.
As the worker is an employee, they are not entitled to statutory payments, nor are they automatically enrolled into a pension. The worker’s entitlement to statutory payments comes through their employment with their intermediary. They can also contribute to a pension as an employee of their intermediary.
Private sector clients are not responsible for deducting student loan repayments for workers engaged through their own companies. The worker will account for student loan obligations in their own tax return.
Workers providing services through intermediaries do not have any employment rights, such as statutory sick pay or holiday pay.
If an intermediary disagrees with how their employment status has been determined, they will need to advise this in writing setting out the basis of the disagreement..
The client will then have 45 days from the date of receiving the worker’s disagreement to respond. During that time the client should continue to apply the rules in line with their original determination.