HMRC clarifies guidance on IR35 off-payroll working rules

Peninsula Team

March 16 2023

In line with IR35, HMRC has issued a set of guidance for off-payroll working for intermediaries and contractors providing services to small clients in the private or voluntary sectors

In line with the legislation, the guidance confirms that if an agency worker provides services to a small client outside of the public sector, the worker’s intermediary will be responsible for deciding the worker’s employment status.

If the off-payroll working rules apply, the worker’s fees will be subject to income tax and National Insurance contributions.

These rules differ from the relationship between intermediaries and medium and large sized clients, who are responsible for determining the employment status.

When contracting with a small client, the intermediary will have to make an employment status determination when hiring a worker. The off-payroll working rules need to be considered by the intermediary or the client for each engagement a worker enters into. If during an engagement there is a change in the terms and conditions, then a review of liability will have to be conducted.

If the rules apply, the intermediary will need to:

  • pay the employer National Insurance contributions to HMRC;
  • pay any tax and the employee National Insurance contributions due, at the end of the tax year; and
  • take into account the deemed employment payment when paying corporation tax and dividends, and when operating the Construction Industry Scheme.

The worker will need to report information about these engagements to HMRC on their self assessment tax return. They will also need to pay any other income tax and National Insurance contributions that are due.

If salary payments are made to the worker during the year, report them to HMRC on a Full Payment Submission on or before the time of payment with a final deadline of 5 April each year.

If an intermediary cannot accurately work out the deemed employment payment by the end of the tax year, they will have until the following 31 January to submit final figures and pay any balance of tax and National Insurance contributions due.

This only applies if you:

  • report a provisional calculation of the deemed employment payment on a Full Payment Submission on or before 5 April;
  • make the appropriate payment of tax and National Insurance contributions to HMRC;
  • report final figures on an Earlier Year Update or further Full Payment Submission submitted on or before the 31 January following the end of the tax year; or
  • pay a balancing payment of any additional tax and National Insurance contributions due by that date.

In these circumstances, interest will be due on the balancing payment but not a late payment penalty. HMRC will review the concession on penalties annually and notice will be given if it is to be withdrawn.

Any workers who receive a salary from an intermediary must be given a P60 after the end of the tax year.

When working out corporation tax liability, HMRC states that the intermediary must deduct the amount of the deemed employment payment and Class 1 employer’s National Insurance contributions due on it. This deduction is only allowed when they work out the taxable profits for the accounting period in which the deemed employment payment is treated as paid.

The fees charged by the agency for providing services are subject to VAT, even if the engagement is within the off-payroll working rules. HMRC said: ‘This is because it’s still [the intermediary] that is contracting to provide service to a client, and as such the supply remains within the VAT regime.’

In a separate guidance document, HMRC has clarified the process for disputing a determination decision made by a medium to large business.

Since the client company has to decide the worker’s employment status, they are also responsible for informing the worker about the decision. If the worker disagrees, they will need to give details of the employment status determination they disagree with, give their reasons for disagreeing and keep copies of any records about disagreements.

A disagreement can be raised until the last payment is made for the worker’s services.

The client has 45 days from the date of receiving the worker’s disagreement to respond. During that time the agency should continue to apply the rules in line with the client’s determination.

If the employment status determination has not changed, the client will have to tell the intermediary’s worker.

If the employment status determination has changed, the client will be responsible for giving a new status determination to the agency worker and confirming when the determination is valid from.

For more information on employment status from a tax perspective, visit BrAInbox today where you can find answers to questions like What is IR35?

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