The off-payroll working rules (IR35) ensure that individuals working like employees but through their service company (PSC) pay broadly the same National Insurance Contributions (NICs) and income tax as directly employed individuals.
There are some critical changes to these rules from 6th April 2021.
HMRC estimates that just 10% of employees who should be paying tax under the current off-payroll working rules are paying the correct amount. At the moment, an individual working through their own company who earns £50,000 but doesn’t follow the rules contributes an estimated £6,000 less (through employer’s NICs, tax, and their own NICs) than a direct employee sitting next to them.
The changes don’t introduce a new tax – they are being introduced to improve compliance with current rules and to ensure the correct tax is being paid from April 2021 onwards. HMRC has already confirmed it will not be using information resulting from the rules’ changes to open a brand new compliance check into personal service companies for tax years before the new regulations are introduced unless there is reason to suspect fraud or criminal behaviour.
From 6th April 2021, medium-sized and large businesses and organisations who sit outside the public sector will take on the responsibility for deciding the employment status of contractors providing services to them for tax purposes. At the moment, individual contractors are the ones who are making this decision.
The changes will bring the private sector in line with the public sector, where these rules have been applicable since 2017. The soon to be introduced changes will not affect those contractors providing services to a small business.
From 6th April 2021, all public sector organisations and medium or large-sized organisations who sit outside of the public sector will be responsible for deciding the employment status for tax of the contractors providing the services.
Suppose contractors work through an intermediary such as a PSC and provide services to any of the above. In that case, their client will give a Status Determination Statement (SDS) that states their employment status for tax purposes and the reasons behind that determination.
If a contractor disagrees with their employment status for tax, they can raise concerns through the client’s status disagreement process. All clients must introduce a process from April 2021, so the client has a responsibility to consider the contractor’s case.
Suppose an engagement is inside the off-payroll rules. In that case, responsibility for deducting tax and NICs from the PSC payment and accounting for employers’ NICs will be with the agency or client paying the PSC (usually the fee-payer).
However, the change will only cover payments made for services provided on or after 6th April 2021.
Unique Payroll can help with any other questions you may have about the upcoming changes in legislation. Call us on 01473 461 028, visit https://uniquepayroll.co.uk/ or email us at firstname.lastname@example.org.
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