If you’re a UK business or recruitment agency engaging limited company contractors, you’ll need to consider the off-payroll working rules, also known as IR35 reform (Chapter 10, Part 2 ITEPA 2003).
For over 20 years contractors have been managing their own employment status for tax under the IR35 legislation (Chapter 8, Part 2 ITEPA 2003). The off-payroll working rules were introduced into the public sector on 6th April 2017, and the private sector on 6th April 2021 to change that.
Put simply, the reform changed who was responsible for determining status and paying tax under the IR35 legislation. Companies who hire limited company contractors are responsible for checking the employment status of their workers, and fee-payers (the businesses which directly pay the contractor’s company) are responsible for ensuring the right taxes are paid to HMRC.
This puts businesses, recruitment agencies, and consultancies at financial risk for non-compliance, such as NHS Digital who were handed a £4.3million tax bill in 2019 for setting IR35 status incorrectly (despite using HMRC’s own CEST tool to do so).
There’s good news though! Qdos are the UK’s leading IR35 advisers and have helped over 2,800 businesses like yours manage off-payroll working (OPW). Whilst understanding the complex legislation itself can prove tricky, there are some simple steps your business can follow to ensure compliance.
From end-to-end assessment services and IR35 insurance to reviewing your outsourced service arrangements, we can help you write policies, implement processes, and keep your projects on track.
The off-payroll working rules are a part of UK tax avoidance legislation (IR35), specifically referring to Chapter 10 Part 2 ITEPA 2003.
The IR35 legislation is all about a contractor’s employment status for tax (IR35 status). It aims to identify if the contractor is providing genuine business-to-business services or if they’re acting as an employee of the end client’s company (a disguised employee).
The off-payroll working rules require the end client company to assess the contractor’s IR35 status and make this decision. The fee-payer, also known as the deemed employer (the party in the contractual chain responsible for paying the contractor) must, in turn, ensure the correct tax is paid to HMRC.
The rules apply to public sector organisations and medium or large private sector businesses that hire the services of personal service companies (limited company contractors).
Engagements between contractors and small companies are exempt from the rules. This means that these contractors retain responsibility for both determining their IR35 status and deducting any relevant tax and National Insurance contributions when working for a small company in the private sector.
Businesses engaging limited company contractors (personal service companies) in the UK will need to ensure compliance with the off-payroll working rules (IR35):
The first step to compliance is always a review of your supply chain to determine your responsibilities within it. Below we highlight the key responsibilities for a typical contractual chain (client - recruitment agency - limited company) however there are variations when it comes to managed services as well as overseas arrangements.
View full checklist for agencies and end clients
With a complex legislation like IR35, there are various factors to consider when implementing your IR35 compliance strategy:
In 2018, a HMRC contractor, Susan Winchester, successfully claimed for unpaid holiday pay of more than £4,000 in an out-of-court settlement, following her inside-IR35 determination from HMRC. Whilst there remains a misalignment between employment status for tax vs employment rights such as holiday pay, this instance stands as a warning to organisations looking to apply inside-IR35 determinations to reduce risk, as it in may raise another in the form of employment disputes.
The Check Employment Status for Tax (CEST) tool is HMRC’s free tool to help businesses determine IR35 status. Whilst this may seem like a good idea, we would never recommend using it in isolation. CEST has been criticised by pretty much the entire contracting industry, including the House of Lords, and leaves 20% of assessments “undetermined”. Read more about CEST and why we advise against it.
Many organisations have held Statement of Works up as a way out of the off-payroll working rules. This is because clients being supplied genuinely outsourced services are exempt from making assessments, and the provider becomes the client for IR35 purposes.
However, these arrangements have to be genuine. Changing existing arrangements from provisions of labour to outsourced services or simply replacing written agreements to Statements of Work simply won’t cut it. Find out more about Statements of Work and outsourced services.