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April 2020 will see new rules in force for those working ‘off-payroll’. The updated IR35 rules aim to level the playing field between those who are directly employed and those who are employed via an intermediary (such as an employee’s own limited company known as a personal service company (PSC)) so that tax and NI payments are at the same level.

These rules have already been applied to the public sector since 2017, and it was announced at the Budget 2018 that the Government will introduce them to all sectors from 6 April 2020. At that point, UK based medium and large organisations will be responsible for assessing the employment status of those who work for them via a PSC, to decide if they should be treated as an employee or as self-employed for tax purposes. If the tests prove you have an employment relationship with your client, then they will need to deduct PAYE tax and employee NICs, and pay employer NICs from your income.

This was previously the worker and the PSC’s responsibility but HMRC reported that less than 10% complied with their responsibilities. These changes are expected to impact 170,000 individuals working through their own company, who would be employed if engaged directly. The measure is targeted at individuals who are not compliant with the current rules; those who are complying with the existing rules should feel little impact – according to HMRC.

Rules within the rules

  • It will not apply to small businesses you work for – you can read more about the criteria and other rules for businesses here.
  • It will not apply to those who are, or are deemed to be, self-employed.
  • Any status change arising from the new rules will not be applied retrospectively. HMRC have confirmed that if you start paying employment taxes under IR35 for the first time, you will not be targeted for taxes in previous years.
  • An organisation’s decision on whether you fall within the rules will not trigger an enquiry in to previous years either.
  • Although the aim is not to stop anyone working via a PSC, it’s worth considering if the taxation changes mean it is no longer of benefit to do so.

New procedures

Where your client has deemed that the off-payroll working rules apply, you (and your intermediary PSC company) will be required to calculate a ‘deemed employment payment’. This is the amount deemed to be your income once certain deductions and employer’s NICs have been removed.

The intermediary is then responsible for paying the employer’s NICs to HMRC, and any tax and other NICs due at the end of the tax year. The deemed employment payment will need to be taken into consideration when paying corporation tax, any dividends to shareholders or operating the Construction Industry Scheme (CIS) regime.

As the individual, you will have to report information about your engagements on your self-assessment tax return. Any deemed employment payment is treated as ‘any other employment income’. If the income is gained as a salary from your intermediary, then the intermediary will need to give you a P60 at the end of the tax year. This will include all the pay, tax and NIC figures needed to complete or be added to your self-assessment tax return under ‘employment’.

Getting started

HMRC’s Check Employment Status for Tax (CEST) is already available to help determine if the off-payroll working/IR35 rules apply to you, or to any other individuals who supply their services via your PSC. Improvements to CEST are being development and tested to ensure an enhanced version is available by the end of 2019 in readiness for next year.

As an individual operating an intermediary company, you can check if you need to calculate the deemed employment payment using this IR35 Excel calculator, referring to this guide for information on what costs to include or deduct as needed.

HMRC have also promised to provide extensive guidance to help organisations implement and apply the off-payroll working rules correctly. This support will take the form of publications and education packages that will include webinars, workshops and one-to-one sessions in various sectors.