Off-payroll working from April 2021

The Off-Payroll working legislation is designed to counteract the tax and national insurance advantages for workers inserting a company between themselves and their end client. This personal service company (PSC) contracts with end clients in order to provide the worker’s services. The PSC would then pay dividends, as opposed to salaries, resulting in National Insurance (NIC) savings.

This type of transaction is already subject to legislation to try and counteract it, known as IR35 which was introduced in April 2000. Where IR35 rules applied, then the worker would be required to operate payroll on payments deemed to be paid by the personal service company.

In 2017, MP Mel Stride commented:

“The cost of non-compliance with IR35 in the private sector is projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23.”

A government consultation paper stated:

HMRC estimates that around a third of people working through their own company should fall within the rules and be taxed as employees. However, currently, only 10% of this group actually determine they should be taxed in this way.” 

It is because of this perceived lack of compliance in operating the rules, that the government decided to introduce the off payroll working rules.

Understanding the Off-payroll working rules

The rules work by switching the requirement to determine whether the off-payroll working rules apply from the worker’s PSC to the end client. With this, the potential liability for underpaid income tax and NI also switches from the PSC to the end client.

When do the rules apply from?

The rules were originally due to begin on 6 April 2020, however at the last minute the government announced a one year delay to the rules as a consequence of the Covid-19 pandemic.  The rules are therefore due to commence from 6 April 2021.

Who do the new rules affect?

The rules will only apply to medium/large businesses. Small companies are exempt from the new rules. A small company is one which can satisfy two of the following three conditions:

  • Turnover for the year not more £10.2m
  • Total assets on the balance sheet not more than £5.1m
  • Average number of employees in the year not more than 50

Where the company is part of a group or there are companies under the same control, these companies must be taken into account. Unincorporated businesses are treated as small if their turnover is less than £10.2 million.

Next steps

Businesses should be taking action now to ensure there is sufficient time to review their contractor’s positions and fully engage with them. Early and regular communications with contractors explaining the upcoming changes and the process, will reduce the risk of status decision challenges.

If you have any concerns regarding the upcoming changes to requirements for off-payroll workers, then please get in touch with a member of our Business Tax team.

A version of this blog originally appeared on the website of one of our MHA association member firms, MHA Moore and Smalley.