Off Payroll Working Rules (IR35) – nearly a month into the new regime
On 6 April 2021 new rules came into effect for individuals who use their own personal service company (PSC) to sell services to clients, and the client companies that engage them.
HMRC are keen to tackle "disguised employment" situations where an individual is de facto employed by a client. This is in part due to the tax and NIC savings made by the individual and the client by treating their relationship as a "client-contractor" one rather than an "employer-employee" one.
Currently the onus is on the personal service company (PSC) to determine whether the individual is in fact truly an employee for tax purposes. However, from 6 April 2021 the duty is for the client company to make a determination whether the individual is truly an employee. These rules already in place for public sector companies.
Within the construction sector developers and other entities (the Client) which are medium or large and which engage sub-contractors through personal service companies (PSCs) will now need to determine whether those individuals are truly employees of the developer for tax purposes. There is a wide range of case law and guidance in place around whether an individual is a disguised employee, focusing on areas such as control, substitutability and mutuality of obligation but nevertheless recent case law such as the Kaye Adams case shows that it is not always easy to determine a worker's status. HMRC expressly states that Clients should not make blanket determinations and must consider each situation on its own fact. The Client will need to give a status determination to the individual and if the Client decide that the rules are in play they must deduct income tax and NICs from any payment to the PSC. If however the payments are made to an agency it will be the agency that pays the PSC that must make the deduction and account to HMRC although the end client is still the one making the determination.
Client engagers must also introduce a disagreement process to allow individuals who have been determined to be disguised employees to challenge this determination. But some clients are trying to put the costs of this onto the PSCs.
What we are also seeing in practice is that, clients with sufficient bargaining power are:
- Asking the PSC to give representation and warranties including that all employment taxes are correctly and fully applied by the PSC
- Requiring the PSC to ensure that all workers in the labour supply chain (eg all sub-contractors of the PSC) comply with their obligations under IR35 and bear all those costs themselves and not on-charge to the Client
- Indemnify the Client for all losses arising from the Client having to pay, deduct or account for any tax as a result of any act or omission by the PSC or any member of the labour supply chain.
A determination that an engagement is within the rules will supersede the Construction Industry Scheme and VAT reverse charge rules and these schemes will not apply to the contract. It will however have tax implications for both the client who must start paying employers national insurance and the contractor who will have income tax and NICs deducted from payment to the PSC.
The key takeaways are that:
- These rules are now active and don't just relate to the IT/media industries
- A determination that a contractor is a disguised employee for tax purposes does not give the contractor any employment rights or entitlements to pension rights or holiday however.
Elizabeth Small is a Partner and Oliver Claridge is an Associate in the Tax team.
This note reflects our opinion and views as of 21 April 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.