IR35 legislation is expected to impact around 170,000 individuals who work through their own personal service company (PSC), who according to the Government would be deemed employed if engaged directly.
Should you require more information regarding whether IR35 impacts you, please read the following article: IR35 Legislation Overview
What is a fee-payer*?
According to the Off-Payroll Working Rules guidance in most cases, the organisation paying a worker’s intermediary will be the fee-payer. To be a fee-payer, you must be the lowest party in the labour supply chain. This is usually the person paying the worker’s intermediary.
As the fee-payer, you should have been given the worker’s employment status determination by the client or agency immediately above you in the supply chain.
If you do not receive the determination, you should pass on the payment without deducting taxes and National Insurance contributions. Before you do this, you may want to ask the client or agency immediately above you in the labour supply chain to find out why you haven’t received a status determination.
Processing the worker's payment through payroll
If you are required to process the worker’s payment through the payroll you must:
calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
pay employer National Insurance contributions
report to HMRC through Real Time Information the taxes and National Insurance contributions deducted
Employment allowance cannot be used against payments to deemed employees
HMRC has also reiterated its previous announcement that the rules will only be applicable to services carried out from 6 April 2021, and not to any payments made on or after 6 April 2021. Therefore, if, for example, services were provided on 30 March 2021 but not paid until 8 April 2021, IR35 rules would not apply. If the services were provided on 8 April 2021, then the new rules would apply.
Payroll process
If you are the deemed employer/fee-payer and need to operate the rules as above there are some key considerations for payroll as follows. If you are an Armstrong Watson payroll client, this will be taken care of for you.
Workers’ should be added to payroll as any other starter would be. They should be issued a starter checklist so they can provide the deemed employer with the information they need to run payroll.
The declaration the worker chooses on the starter checklist will determine their tax code. Usually, this will be declaration C as the worker will already have a primary employment with their intermediary. This would put them on tax code BR. 0T week 1 / month 1 would apply if the worker does not return the starter check-list.
HMRC can then issue another tax code if it is required.
Devolved powers that affect tax codes would apply as normal, for example, Scottish rates of income tax.
When running payroll, the RTI flag should be set to show the individual is an off-payroll worker; this is important not only for HMRC to know they are this type of worker, but to ensure no student loan notice will be sent to you (as these are not deducted under off-payroll working rules).
Benefits in kind are treated in the same way under the off-payroll working rules. So Class 1A NICs should be calculated and paid to HMRC and P11D forms completed.
Deemed employees can also be taken off the payroll in the same way and given a P45.
Deemed employees can also be given a P60 at the end of the tax year.
You should apply the apprenticeship levy and make any payments necessary.
As stated above, Employment Allowance cannot be used against payments to deemed employees and the secondary NICs relating to off-payroll workers doesn’t apply towards the Employment Allowance limit.
Case study of worker/intermediary calculation
An example of a simple payroll calculation; if you are the worker and paid through the intermediary will be as follows:
The fee-payer will pay VAT if you’re VAT registered, and then deduct Income Tax and employee National Insurance contributions from your fee. This means the payment you receive will have had tax and National Insurance deducted.
For example:
You invoice the fee-payer for £7,200 of the worker’s services provided (£6,000 fees and £1,200 VAT).
From the worker’s fees of £6,000, the fee-payer deducts £1,613 (£1,200 tax at 20% basic rate and £413 employee National Insurance contributions) which it pays to HMRC.
You receive a payment of £4,387 for the services plus £1,200 VAT.
The fee-payer also pays employer National Insurance contributions.
If the off-payroll working rules apply, your income for your worker’s services will have had tax and National Insurance contributions deducted from them. This means that when you pay the worker they do not need to pay tax and National Insurance contributions again on those fees.
You can do this by either paying it as:
a salary through your payroll but don’t deduct tax or National Insurance contributions
dividends - these do not need to be recorded on your worker’s Self-Assessment
As the amounts have already been treated as employment income doing it this way will avoid any double payment of tax or National Insurance contributions.
Report any non-taxable payments you make to the worker using the Full Payment Submission. Your payroll software should produce this.
Corporation Tax calculations
When you calculate your company’s taxable profit, you should deduct the VAT exclusive amount of the invoice. This is the amount from which Income Tax and National Insurance contributions were deducted at the source.
Your company accounts should show this deduction to make sure the amount is not taxed twice.
VAT
If you’re VAT registered, you should continue to include VAT in your invoices. You’ll need to file your VAT returns and pay HMRC any VAT payments that are due.
Useful links
Visit GOV.UK website for a wealth of useful publications covering all the changes to the off-payroll working rules from April 2021.
Amongst other things, you will find a very useful case study along with top tips and also a decision-making tool for contractors.
