What is off-payroll working? What is IR35? What are the tax rules for off-payroll working or IR35? How do you check employment status? What is a personal service company?

Off-Payroll Working is the term used by HM Revenue & Customs (HMRC) to describe the situation where an individual worker provides their own personal services via a Personal Service Company (PSC) to an End-Client.

The Off-payroll working tax rules are essentially anti-avoidance provisions. They aim to ensure that where a worker performs the same kind of work as an employee of the End-Client, any fees paid in respect of the worker's services via the worker's PSC, or if paid directly to the worker are subject to PAYE.

Application of the rules depends on:

• The identity of End-Client in a labour supply chain, the size of the End-Client and the worker's deemed employment status.
• Employment status is determined by the End-Client or in some cases by the PSC, the deemed employer is then responsible for deducting PAYE. This could be the End-Client, an employment agency or the PSC itself (see box below).

There are two versions of the rules:

• If the End-Client is small, IR35 applies: the PSC must assess employment status..
• If the End-Client is in the public sector or (from 5 April 2021) is a large or medium sized entity, the End-Client must assess employment status.

The Off-payroll working rules do not apply if the worker's employment status determination indicates that the worker would not be an employee of their End-Client if we imagine a situation where they were to work directly for that End-Client.

• In practical terms, the public sector and larger End-Clients may operate a blanket approach to the issue and may reclassify all workers as employees in order to avoid the risk of potential PAYE non-compliance. 

In summary:

• When Off-Payroll Working applies, the top party in the labour supply chain has the obligation to assess employment status and the same or a different party deducts PAYE and National Insurance from the fee paid to the worker's company.
• Different parties in the chain must apply the rules, depending on the type of end-client and who is the fee payer.

The off-payrolling labour supply chain generally looks something like this:

Worker > PSC > Agency > End-Client

There can be numerous agencies or other intermediaries in the chain. e.g.

Worker > PSC > Agency > Agency > Intermediary > End-Client

Worker > PSC > End-Client

Tax outcomes: where IR35 does not apply

• Public sector and (from 6 April 2021) large/medium sized End-Clients: the employer operates PAYE/NICs.
• The employer may be an agency or the End-Client.
• The resulting net pay paid to the worker's PSC is treated as the worker's taxed employment income.
• Any expenses that would be allowable had the worker actually been working for the End-Client are deductible from the PSC fee before PAYE and NICs.
• The worker does not acquire any employment rights from anyone under these rules: it has no right to statutory sick pay, types of baby pay or employer-provided pensions.
• The deemed employer is not required to account to HMRC for student loan deductions: this remains the duty of the worker.

Who does what in the chain?

The Off-Payroll Working rules have different variations which apply as follows, depending on the status of the end-client:

End-client type	Who assesses the worker's employment status	Who deducts PAYE/NICs	When from
Public sector	end-client	Fee payer	6 April 2017
Large or medium-sized private sector	end-client	Fee payer	6 April 2021
Large or medium private sector (IR35)	PSC	PSC	Until 5 April 2021
Small private sector (IR35)	PSC	PSC	Ongoing

 

Off-Payroll Working for Public sector clients

• The End-Client assesses the worker's employment status and informs the Fee Payer
• The Fee Payer, who is normally the end-client or an agency deduct PAYE and NICs from the fee paid to the worker's PSC.
• See Off-Payrolling Public Sector 

Off-Payroll Working for Large or Medium-sized private sector clients

These now apply from 6 April 2021, having been delayed from April 2020 in March 2020. See IR35 changes postponed for a year due to COVID-19

• The End-Client assesses its own size and notifies the worker that it is a large or medium-sized client.
• The End-Client assesses the worker's employment status and informs the fee payer and worker.
• The Fee Payer, who is normally the end-client or an agency deducts PAYE and NICs from the fee paid to the worker's PSC.
• See Off-Payroll Working Private Sector

Off-Payroll Working for Private sector clients

a) Rules up to 5 April 2021: 

• The PSC makes an assessment of its worker's employment status based on its knowledge of the end-client.
• If IR35 applies, the PSC deduct PAYE and NICs from the fee it receives from the engagement and reports it under its own PAYE reference as a deemed salary payment.
• See IR35 Off-Payroll Working Private Sector

b)  Rules after 6 April 2021: 

• The requirement of a material interest in the corporate intermediary ('the company') has been effectively removed.
• The end-client informs the company of its size.
• If the end-client is a small entity, the old 'IR35' rules apply:
  • The company makes an assessment of its worker's employment status based on its knowledge of the End-Client.
  • If IR35 applies, the company deducts PAYE and NICs from the fee it receives from the engagement and reports it under its own PAYE reference as a deemed salary payment.
    • See IR35 Off-Payroll Working Private Sector
• If the End-Client is a large or medium-sized entity, the new rules apply:
  • The End-Client notifies the worker that it is a large or medium-sized client.
  • The End-Client assesses the worker's employment status and informs the fee payer and worker.
    • The Fee Payer (whose identity depends on the supply chain) deducts PAYE and NICs from the fee paid to the company.
    • The Off-Payrolling large or medium-sized entity rules apply

Who is responsible for notifying who?

It is always the duty of the End-Client to assess employment status and pass on that assessment to the Fee Payer and the worker unless the end-client is a small operation. In that case, the worker's intermediary checks their employment status and applies IR35.

WARNING: If the End-Client or any other party in the chain fails to pass on the results of the employment status test it will become the deemed employer's fault.

How to check your employment status?

• The End-Client and intermediary should start by using HMRC's Check Employment Status Tool 'CEST'
• The CEST results of the test are accepted by HMRC provided that the questions are answered as accurately as possible.
• A worker challenging the CEST result will need also to work through the CEST tool if they are challenging an end-client's status determination statement.
• See Employment Status Tests for a rundown of the different tests and case law.

What's new?

See a summary of the latest news in our update: Contractors & PSC Planning: November 2019 what now?
This includes a detailed section on working via an 'umbrella' and added some further tips on what you can do with your company if it ceases trading. 

Useful guides on this topic

Personal Service Company (PSC) tax (subscriber guide)
What is a PSC?  What are the tax implications for a PSC?  

IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

HMRC employment status tool (CEST)
This tool can be used by workers, agencies and engagers in order to determine whether a worker is employed or self-employed for tax purposes.