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 services
  • via their own private company
  • to an end client
  • and,
  • the following test is met:
  • if that the worker were actually providing those services directly to the end client, the worker would meet the employment status tests to make them an actual employee of the end client.

When Off-payroll working applies, one 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 apply the rules, depending on the type of end client.

The worker's company is described as a Personal service company 'PSC'.

The 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

Tax outcomes

  • The party that operates PAYE/NICs is treated as the employer for tax.
  • The resulting net pay paid to the worker is treated as their 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 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 2020
Large or medium private sector (IR35) PSC PSC Until 5 April 2020
Small private sector (IR35) PSC PSC Ongoing

Off-payrolling 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 apply from 6 April 2020

  • The end client assesses its own size and notifies the worker.
  • 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-payroll working Private Sector

Off-payroll working for Private sector clients

a) Rules up to 5 April 2020: 

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

b)  Rules after 6 April 2020: 

  • The End Client informs the PSC of its size.
  • If the PSC is a small entity
    • The PSC makes an assessment of its worker's employment status based on its knowledge of the end client.
    • 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.
  • If the PSC is a large or medium sized entity

How to check your employment status?

  • End clients and PSCs 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 run down of the different tests and case law.

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