Legal briefing | Incentives & Remuneration, Employment |

The New Off-Payroll Working Rules: Do they apply to my business?

Overview

The new Off-Payroll Working Rules (the 'New Rules') will come into effect from 6 April 2021.  Organisations engaging the services of workers through intermediaries both directly as well as through agencies, will have greater administrative and financial burdens under the New Rules. We can guide you through the changes and the steps you should follow to take account of them.

The current state of play

The New Rules were due to take effect from 6 April 2020.  However, on 17 March, the Government announced that the changes would be delayed by one year as part of a package of measures to ease pressure on businesses in light of the coronavirus outbreak. 

The Government has, however, made it clear that this is a delay and not a cancellation of the New Rules which have been enacted and will now apply from 6 April 2021. Many companies have already planned or made changes to the way they engage contractors. 

The New Rules in a nutshell

In summary, the New Rules will affect fee payments made in respect of workers who provide their services through intermediaries such as personal service companies (PSCs) and will apply to payments for services performed from 6 April 2021. 

Essentially, clients engaging such intermediaries will need to decide whether, if you ignored the existence of the intermediary, the worker would be regarded as their direct employee (or office holder) for income tax purposes.  If they would, then the client (or the agency paying the intermediary if different) must deduct income tax and NICs from the fees paid to the intermediary and account for employers' NICs (and apprenticeship levy if relevant) as if the fees were payments of salary.  The rules are an extension of the existing tax regime known as IR35 under which the intermediary (rather than the end client) decides the status of the worker and accounts for any tax and NICs due.  In response to concerns that many intermediaries were not complying with their obligations under IR35, in 2017 the Government changed the rules for public sector clients by moving responsibility for determining status and accounting for tax from the intermediary to the client.  The New Rules will extend the public sector changes to medium and large clients in the private sector and make additional modifications.  IR35 will continue to apply to intermediaries that provide their services to private sector clients that are small or have no UK connection in a tax year.

1  This guide sets out the New Rules by reference to the draft legislation and guidance available at the time of writing. We do not expect these to change fundamentally but it is possible that the final rules will contain some modifications.

When do the New Rules apply?

The New Rules only apply to payments made for services carried out on or after 6 April 2021.  If a payment is made for services provided both before and after 6 April 2021 there are transitional provisions that allow a 'just and reasonable' apportionment to be made.  The New Rules will apply to the part of the payment that can be reasonably seen to be for the services provided on or after 6 April 2021. 

 

For guidance on how to apply the New Rules please read our companion article, 'The New Off-Payroll Working Rules: What do you have to do?'.

Don't the New Rules just apply to TV and radio presenters?

No – the New Rules apply to any type of business that receives services from a worker through the worker's intermediary (usually a PSC).  It is true that there have recently been a number of high-profile cases concerning the application of the existing rules to the PSCs of certain TV and radio presenters, but the rules apply regardless of the type of business concerned.

I've heard that the New Rules don't apply to small businesses

It is true that the New Rules do not apply where the client (i.e. the business receiving the services) is in the private sector and is considered small for Companies Act purposes (see the answer to Question 3 for an explanation of when a business will be considered 'small'). However, even if the business is small, this doesn't mean that the worker's intermediary is outside the scope of the off-payroll working rules completely. Instead, the existing rules will continue to apply and the intermediary will need to make the decision as to the worker's status and also account for any tax and NICs that become payable.

When does the exclusion for 'small' businesses apply?

Broadly, a company (there are other tests for businesses not operating through companies) will be 'small' for a tax year if it meets at least two of the following for two consecutive financial years:

  • It has a turnover of not more than £10.2 million;

  • It has a balance sheet total (assets) of not more than £5.1 million;

  • It has no more than 50 employees (averaged over the financial year). 

Balance sheet total means the total amount shown as assets in the company's balance sheet before deducting any liabilities.  When applying the criteria, the company has to look at the last financial year for which the period for filing its accounts and reports ended before the start of the tax year.  So, if a private company has a financial year ending 31 March, it must file its accounts by 31 December. In deciding whether the company is small for the purposes of the 2021/22 tax year it will need to look at the two financial years ending 31 March 2020.

A parent company can only qualify as small if the group as a whole (when aggregating the turnover, balance sheet total and, employees of the group) is small. Note that the exclusion for small businesses only applies to private sector clients and is not relevant to clients in the public sector.  Also, it is important to remember that only small clients are excluded – not small fee payers (e.g. agencies) or small intermediaries.  Some companies (such as public companies) are excluded from being small under the Companies Act even if they meet the financial tests set out above.

Note that a worker or agency will have the right to ask a client whether it is 'small'.  The client will have a legal obligation to respond to any such enquiry within 45 days.

Our parent company is a PLC but all our workers are hired through a subsidiary in the group that is 'small'. Does this mean we don't need to worry about the New Rules?

No, the New Rules will still apply. This is because the legislation contains provisions under which a subsidiary with a parent that is not small cannot, itself, be treated as small.

Our company is not a member of a group but we have an investor that can exercise control over it in some circumstances. Does this change the analysis?

It could do – where a company is not a member of a group you must add the turnover of any "connected" persons when working out its size.  In broad terms, a company will be connected with anyone that has direct or indirect control of it.

I have also heard that the rules don't apply to clients that are offshore

The New Rules won't apply to clients in the private sector (whatever their size) if they don't have a 'UK connection' for the relevant tax year.  Broadly, a company will have UK connection if:

  • It is resident in the UK (essentially if it is incorporated in the UK or centrally managed and controlled here); or

  • It has a permanent establishment in the UK (broadly this is if it has in the UK (i) a fixed place of business through which the business of the company is wholly or partly carried on or (ii) an agent acting on behalf of the company that has and habitually exercises authority to do business on behalf of the company).

Unlike the small company exemption, you only look to the client company (not the group as a whole) and there is no equivalent right for the worker or agency to ask whether or not the client has a UK connection.  As with the small company exemption, if the client has no UK connection, the existing off-payroll working rules will apply to the intermediary which will need to determine whether or not it has to account for tax or NICs under them. 

I've checked with our HR department and they have said all our contractors are within the existing off-payroll working rules and paying tax and NICs to HMRC as a result. Does this mean we don't have to worry about the New Rules?

Unfortunately, not. This is an aspect of the change that many organisations may find surprising. Under the New Rules even if the intermediary with which you contract is fully compliant with the existing rules, from 6 April 2021, you, as the business receiving the services, will have an obligation to apply the New Rules instead (see the paragraph headed 'The New Rules in a nutshell' above).

It is therefore important that the services contract governing such engagements allows for the change and that you have the appropriate payroll processes in place.

We are a public sector client and already operate the New Rules - do we need to change anything?

Yes, the changes to the legislation don't just extend the rules to private sector clients, they also modify the existing processes for those in the public sector. One of the most significant changes is a new requirement for clients to issue a Status Determination Statement (SDS) to the worker and (where relevant) the agency with which they contract. Unlike the existing rules, the SDS also has to state the reasons for the decision up-front. There is a new client-led status disagreement process and you will need to ensure that you have appropriate administrative processes in place to deal with this (please read our companion article, 'The New Off-Payroll Working Rules: What do you have to do?' for more information).

We engage workers through agencies and umbrella companies who deduct tax and NICs from payments made to the workers - does that mean we don't have to worry about the new rules?

Where the worker is not providing their services through an intermediary, other tax rules will ensure that tax and NICs are applied, therefore the arrangement will not be within the off-payroll working rules. However, clients need to be fully aware of the way in which their workers are hired particularly where long supply chains exist. Detailed due diligence is important as getting the rules wrong could mean that you as the client are responsible for unpaid tax and NICs (together with penalties and interest). You need to be absolutely sure that your workers do not provide their services through intermediaries that are caught by the New Rules. 

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