Off payroll working - new rules

The off-payroll working (OPW) rules change for private sector engagers from April 2021. We consider the impact of these changes on the finance function and other parts of the organisation.

Small entities are exempt from the rules, but how do you know if the organisation is small? The tax legislation uses the Companies Act 2006 small company regime for this purpose.

If the company is not a member of a group, the test is applied to the most recent set of accounts that were due to be filed at Companies House in the preceding tax year. If the company is a member of a group, the test is applied to the group as a whole – the parent company and all subsidiaries, again using the most recent set of accounts.

This article assumes that the entity is not small. Therefore, OPW rules apply.

The entity will need to identify which engagements are within scope of the rules. For example, where a contractor is engaged directly (not by an intermediary company) the rules will not apply. 

Having identified the engagements in scope, the business should then assess their employment status. For example, should the individual be treated as a ‘deemed employee’ for tax purposes? This will involve consideration of the facts of the engagement, whether embodied in contractual agreements or practical issues arising through day-to-day working arrangements. There are a number of resources available to help:

• HMRC’s Employment Status Manual (see ESM0500 - Guide to determining status); and
• HMRC’s Check Employment Status for Tax online tool. Outputs and summary of responses should be retained to demonstrate the issues considered. These will form evidence to support the decision in the event of a dispute.

In very complex cases it might be necessary to consult a specialist.

Having carried out a status assessment for each contractor, for any engagements that fall within the OPW rules, the business must inform the individual by issuing an SDS, and tell the worker on what basis the decision was made about the status of the engagement and the conclusion that it is caught by the rules.

There is no prescribed format for the SDS. It can be sent via post or email.

The entity can choose how to process invoices received from the contractor, but ultimately these will be passed to the payroll department to calculate deductions. Invoices can be processed as normal through the purchase ledger before being passed on. Alternatively, the invoice can bypass the finance process and pass straight to payroll.

It will be important to highlight to the finance team the engagements caught by the rules, and what should be done on receipt of the invoice. This is likely to include capturing and processing the VAT, materials and allowable expenses elements of the invoice.

Either the in-house payroll team or an outsourced payroll agent will need to withhold tax and national insurance from the contractor’s invoice for any engagements that are within the rules.

As is the case for an actual employee, a deemed employee will need to complete a starter checklist.

Payroll software will contain a marker that should be set against the record of deemed employees. This acts to suppress functionality not applicable to them, such as student loan repayments.

Input VAT will need to be identified for recovery in full or in part and posted to the organisation’s VAT recoverable account. The net amount of the supply will also need to be identified for inclusion in the VAT return submission.

Our guide is available exclusively to members.

• Off-payroll working - a user guide

The ICAEW Library & Information Service provides access to leading business, finance and management journals, as well as eBooks.

Further reading on off-payroll working is available through the resources below.