Off-Payroll Working, commonly known as IR35
The off-payroll working rules are a set of anti-avoidance provisions that were introduced, originally in 2000, in an attempt to tackle the problem of ‘deemed employment’.
The general principle behind the anti-avoidance provisions was to counteract situations where individuals would personally provide their services to an entity but they would be paid to a separate entity related to the individuals (more often than not a company controlled by the individuals).
Under the original rules, the intermediary entity, more often than not being a company controlled by the individual, should have performed an assessment to see whether the individual would have been considered an employee of the engaging entity if the engaging entity had contracted with the individual directly for their services.
Where it was determined that the individual would have been deemed an employee of the engaging entity but for the existence of the intermediary entity, the intermediate entity should broadly have treated the amount received by the company as wages payable to the individual through PAYE.
Changes to the Rules
Various changes have happened since 2000, the latest ones have meant that the onus of assessing the employment status of the individual providing their services is now the responsibility of the engaging entity in the following scenarios:
- After 6 April 2017 and the engaging entity is a public authority
- After 6 April 2021 and the engaging entity is either a medium or large sized organisation
Small private sector entities, are not responsible for deciding the employment status of the workers. This assessment remains the responsibility of the intermediary.
A company/LLP will be considered medium or large if it, or the parent company of a group, meets at least two of the following criteria:
- Annual turnover more than £10.2 million
- Balance sheet totalling more than £5.1 million
- More than 50 employees.
In relation to other types of organisations (e.g. sole traders and partnerships), they will be considered medium or large if their annual turnover is more than £10.2 million.
Requirements Where the Rules Apply
Where the engaging entity is required to assess the employment status, they will be responsible for assessing the employment status of every worker, regardless of whether they operate through their own intermediary or are provided by an agency. The engaging entity is required to advise the worker/agency of the results of its assessment including reasons for the result.
Where the results of the assessment determine that the individual would be considered an employee, the engaging party will be responsible for deducting Income Tax and Employee’s National Insurance Contributions from the amounts payable under PAYE together with being liable to Employer’s National Insurance Contributions on such amounts.
If a worker disagrees with the assessment of employment status an appeal to the engager can be made and they will then have to provide confirmation to the worker/agency of the results of the reconsideration together with reasons.
Assessing Employment Status
To date there are no set of definitive rules to determine whether an individual would be considered an employee or not for tax purposes. Instead, we have to rely on case law which over the years has determined the following factors which need to be considered when making an assessment:
- Mutuality of obligation – whether the entity is obliged to offer work and the work obliged to accept
- Right of control – who controls the individual
- Provision of equipment – which party provides the tools
- Right of substitution – whether another person could/has undertaken the work
- Financial risk – requirement to rectify unsatisfactory work and in who’s time
- Opportunity to profit – who gains from time efficiency
- Degree of integration into entity – whether employee benefits are made available
- Right of termination – notice period
- Number of paymasters – how many clients?
No single factor will be determinate of an individual’s employment status with an assessment needing to be considered across all factors. It is however acknowledged that certain factors may carry more or less weight in reaching a conclusion than others depending upon the nature of the work and engagement.
Although far from fool proof, HM Revenue & Customs have produced an employment status checker tool to aid with assessing the employment status in most instances which can be found at:
https://www.gov.uk/guidance/check-employment-status-for-tax
It has no legal status, but can form a guide.
As a final point, it should be noted that although contracts are more often than not the starting position of assessing an individual’s employment status, if these are not reflective of the actual working practices, these will often be overlooked in the event of any enquiry or scrutiny.
Should you require any further information or assistance with assessing any particular cases, please do not hesitate to contact us.
Article written by Richard Paul.