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Off-payroll working (IR35) by medium or large entities in the private sector

Given the numerous ways in which working engagements using a personal service company (PSC) for a large company or other entity in the private sector can be carried out, the new rules from April 2020, about tax and NICs for off payroll working (OPW) – also referred to as IR35 – should be understood by anyone working in or with that sector.

Since 6 April 2017 the UK has had two sets of tax rules for off-payroll contracts. Many of these contracts will be undertaken by a worker operating through their own PSC. Where work has been undertaken for a private sector engager, or client, the worker has remained responsible for determining the tax status of the contract and ensuring that the IR35 rules are applied to any income of their PSC if the work is a disguised employment.

New rules are currently being finalised for implementation from 6 April 2020. There will still be two sets of tax rules for off-payroll contracts, but work for large and medium-sized clients in the private sector will now follow the same rules as apply in the public sector. The public sector rules are themselves being modified.

In most cases, the new rules will apply to payments made after 5 April 2020 regardless of the date of the contract for the work or the date the actual work is performed.

Where work is undertaken for a public sector client or for a large or medium-sized client in the private sector, that client is becoming responsible for determining the tax status of the contract: does it look more like disguised employment or a PSC providing services? If it is disguised employment, any payments made to the worker under the contract must be made under deduction of PAYE and National insurance.

Important changes to note for contracts extending beyond 5 April 2020, are the new requirement for a Status Determination Statement and the new disagreement process.

Where work is undertaken for a small private sector client, the existing private sector rules (IR35) continue unchanged. The worker remains responsible for determining the tax status of the contract and ensuring that their PSC applies the IR35 rules if the work is deemed employment. The rules for small clients and those working for them are not changing.

Establishing the size of the client – small, medium or large?

A private sector engager, or client, is responsible for establishing whether it is a large/medium (L/M) or a small client. 

The easy guide to size which should give an accurate answer is to consider whether the client company is a commercial company and currently needs an audit. A commercial company which needs an audit will be L/M; a company which does not will be small. 

The draft legislation published on 11 July 2019 requires the size of a company to be determined using the definitions and terminology in s382, CA 2006. Certain companies are excluded from being small, for example all public companies. 

Non-corporate entities need to assess themselves using the level of their turnover alone.

The application of these rules is explained in detail in our TAXguide 14/19 Off-payroll working (or IR35).

There is, somewhat surprisingly, no legal requirement for a private sector client to pass on any information specifying its size to any other party involved. While size may be obvious, this cannot be presumed and it would seem sensible in practice for a client or their adviser to ask for a size statement along with the contract, so that everyone in the chain, particularly the worker, knows whether the contract is operating under L/M OPW rules, or the small engager rules, and so who is responsible for what. 

This size statement should be renewed at appropriate intervals, perhaps annually, because if the client’s size changes, responsibilities may also change.

Remember. If the private sector client is small, it is not responsible for taking the employed/self-employed decision. It does not have to pass any information to any other party in the chain.

Status Determination Statement

Large/medium (L/M) private sector clients and all public sector clients must review each contract, decide whether it implies employment or self-employment tax status and issue a Status Determination Statement (SDS) accordingly.

The SDS is a new and important practical document informing all entities in the labour supply chain whether or not payments for the work will need to be made under deduction of PAYE and national insurance. Many businesses will use the HMRC Check Employment Status for Tax (CEST) tool to make the determination.

The SDS must also include the reasons for the decision. The client must take reasonable care when making the determination, otherwise the obligation to issue an SDS isn't met.

The client must give the SDS together with the reasons for the conclusion to the person they contract with and also to the worker who is providing their services via their PSC.

The client is not required to inform any other person in what might be a long contractual chain between themselves and the worker. Instead, each entity in the supply chain must pass on the SDS and the reasons for it to the next in the chain, until they eventually reach the fee-payer. The client in a multi-layered intermediary arrangement does not have to inform the fee-payer of the determination directly.

See our TAXguide 14/19 Off-payroll working (or IR35) for more detail on the possible risks and responsibilities associated with the SDS.

Disagreement with the Status Determination Statement

Either the fee-payer or the worker can challenge a status determination with the client. It will therefore be necessary for the client to have a process in place to handle such disagreements. There is no time limit for making such challenges.

Discussions about disagreements over a status determination will be led by the client who made the SDS. There is no appeal to HMRC.

The challenger should give reasons and provide evidence to support these reasons.

The client must then consider any further information provided, reconsider the status determination and decide whether to maintain the original determination and if so to give reasons, or otherwise to withdraw it. They must respond to the fee-payer and/or worker within 45 days of receiving the disagreement.

Note

Where work is undertaken for a small private sector client, the existing private sector rules (IR35) continue unchanged. The worker remains responsible for determining the tax status of the contract and ensuring that their PSC applies the IR35 rules if the work is deemed employment. The rules for small clients and those working for them are not changing.

Further details and advice are available in the following TAXguides and webinars which are available for free download to members of the ICAEW Tax Faculty. Membership of ICAEW is not required to join the Tax Faculty.

TAXguides

Webinars

TAXguides are published by the Tax Faculty to provide practical guidance to practitioners on important developments to tax practice and policy.