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Case studies - off-payroll working rules (IR35)

Updated 29 April 2021

The government has announced it is postponing the reforms to the off-payroll working rules (IR35) from April 2020 to 6 April 2021. This is a deferral of the introduction of the reforms, not a cancellation. The government remains committed to introducing this policy to ensure that people working like employees, but through their own limited company, pay broadly the same tax as individuals who are employed directly.

The policy will be introduced on 6 April 2021 representing a 12-month delay.

This deferral has been announced in response to the ongoing spread of coronoavirus (COVID-19), to help businesses and individuals deal with the economic impacts of the pandemic. Find out more: COVID-19: guidance for employees, employers and businesses.

These are illustrative scenarios of how the process works around off-payroll working rules (IR35) from the perspective of both contractors and clients.

There are many factors which will determine if the rules apply to an individual engagement. These examples are designed to show some of the factors involved and the steps that need to be taken. They are not representative of any specific situation, but give a flavour of the types of scenarios people might be working in.

Example 1: contractor considering a second role with a new client

Topics covered:

• taking a second role with a new client
• working through a personal service company
• using the Check Employment Status for Tax tool

The contractor’s point of view

Situation

Sanjit is a 26-year-old radio presenter living and working in Manchester. He is engaged by a local radio station to present a news programme. The radio station is a medium-sized business. Sanjit has been in the role for 6 months, he works part time hours under a contract between the radio station and his own personal service company (PSC).

Issue

Sanjit is approached by another radio station to present a news discussion show. The programmes are recorded on different days and Sanjit wants to accept the second job. He checks with his current radio station first who inform him that he is not able to accept the role at the second radio station.

Actions taken

Sanjit looks further into the clauses in his contract and realises off-payroll working rules may apply to his current engagement. He goes onto GOV.UK and reads the understanding off-payroll working guide which leads him to use the online Check Employment Status for Tax (CEST) tool. Answering all of the information accurately, the result for Sanjit is that this engagement is within scope the off-payroll working rules (IR35).

How the off-payroll working rules (IR35) apply

Sanjit is deemed to be an employee for tax purposes for a number of reasons, one being that he is unable to accept other work in similar roles.

Sanjit understands that the responsibility to apply the rules lies with the client. The radio station provides Sanjit with a Status Determination Statement setting out its decision and reasons why.

Outcome

As the radio station pays Sanjit’s PSC directly, it must now set Sanjit up on its payroll system and operate PAYE on payments made to him.

Sanjit’s PSC is still required to submit a tax return, but relief is available on the tax already paid.

The hirer’s point of view

Situation

Lisa runs a local radio station in Manchester. Sanjit has been working part-time hours at the station for 6 months presenting a news programme. Sanjit is engaged under a contract between his PSC and Lisa’s radio station, which is a medium-sized business.

Issue

Sanjit informs Lisa that another radio station has approached him to present a news discussion show. The programmes are recorded on different days so he would have time to fulfil both roles. Lisa tells Sanjit that the contract he has signed with Lisa states that he cannot work for another radio station alongside his current role.

Sanjit turns down the new role and arranges a meeting with Lisa.

Actions taken

Lisa has heard of the new off-payroll working rules after receiving a letter from HMRC on the subject. She visits GOV.UK to find out more, and uses the CEST tool, answering all the questions accurately.

How the off-payroll working rules (IR35) apply

Lisa determines that Sanjit is deemed to be an employee for tax purposes.

Lisa issues Sanjit with a Status Determination Statement setting out the decision and the reasons why. As Sanjit has already looked at the guidance himself he already understood that the off-payroll rules might apply.

Outcome

Lisa reviews the contracts of all other contracted workers to check that they are all compliant with off-payroll working rules.

Example 2: contractor recruited through an agency

Topics covered:

• hired and working through an agency
• control of contractor by client
• working through a personal service company
• using the Check Employment Status for Tax tool
• being aware of tax avoidance schemes

The contractor’s point of view

Situation

Adele is a 57-year-old operations analyst. She has been working for a large multinational bank for 2 years. The bank is based in England and Adele works from their largest branch in Newcastle. Adele was originally hired by the bank through an agency and she operates through her own PSC.

Issue

Adele is contacted by Tim who runs payroll for the bank from their Leeds office. Tim explains that there will soon be changes to off-payroll working rules that will affect her tax status.

Actions taken

Tim provides Adele with a Status Determination Statement that sets out that Adele’s contract falls within the off-payroll working rules and the reasons why.

Adele believed that the changes would not affect her as she operates through her PSC and was hired by the bank through an agency. Tim directs her to guidance on the subject so that she can find out more about the rules.

How the off-payroll working rules (IR35) apply

Adele is affected by off-payroll working changes because:

• she provides her services to the bank
• she works in a way similar to that of an employee

For a number of reasons she is under the control of the bank in terms of the work that she delivers and how it progresses. She will remain under the control of the bank for the duration of her contract.

Avoiding tax avoidance schemes

Adele is approached about a scheme to avoid off-payroll working rules (IR35). It offers to increase her take home pay and ensure she’s not affected by IR35. This sounds too good to be true, so she looks to find out more. From her research, Adele is unconvinced that the scheme is compliant with the rules and she takes note of the HMRC guidance on tax avoidance schemes aimed at contractors and agency workers. She decides not to enter the scheme as she wishes to be sure she is operating correctly within the rules.

Outcome

Adele now understands that she is deemed to be an employee for tax purposes. This means that the agency which pays her PSC will deduct income tax and National Insurance contributions (NICs) before paying her PSC for services.

The agency that pays Adele sets her up on PAYE so deducts income tax and NICs from her payment before she receives it.

Adele’s PSC is still required to submit a tax return, but relief is available on the tax already paid.

The hirer’s point of view

Situation

Tim works for a large multinational bank based in England, and is in charge of payroll at their office in Leeds. The bank recognises the need to prepare for the introduction of the off-payroll working rules. They have provided training around the employment status and off-payroll working rules which Tim attends alongside a group of colleagues who manage payroll.

After the training, Tim has been assigned to review all existing contracts with workers in the North East who provide their services through personal service companies. Tim must determine who will be affected by the new off-payroll working rules and apply the necessary changes.

Issue

The bank has introduced a policy to use HMRC’s CEST tool on a case by case basis to decide where the changes will affect its workers. Tim understands that for any contractors where the bank pays the PSC direct (rather than through an agency) the responsibility for calculating and deducting income tax and NICs rests with the bank.

How the off-payroll working rules (IR35) apply

Tim has discovered that off-payroll working rules apply to Adele’s contract. He arranges a meeting with her to explain what these changes are and how they will affect her. He gives Adele a Status Determination Statement, stating that she is found to be an employee for tax purposes and the reasons for this.

Actions taken

As the bank does not pay Adele directly, but pays for her services through an agency, Tim does not set her up on PAYE. Instead he passes the Status Determination Statement on Adele’s status to the agency which supplies Adele’s services. The agency who pays Adele’s PSC puts Adele on PAYE and deducts income tax and NICs before paying her for her services.

Outcome

Adele continues working in her role as Operations Analyst, through her PSC, at the bank.

Example 3: contractor responsible for a team of client’s employees

Topics covered:

• management responsibilities of a contractor
• working for a single client
• working through a personal service company
• using the Check Employment Status for Tax tool

The contractor’s point of view

Situation

Vasilis is a 38-year-old risk management consultant working for a large pharmaceutical company in Cardiff. He has been working for the same company for 9 months and has no other engagements. Vasilis operates through his PSC as he has done for numerous other companies in the pharmaceutical and healthcare industry. His contract was agreed for 7 months followed by a month by month rolling basis. He has estimated that he will need to continue working for the company for another 5 months to complete his work.

Issue

Vasilis works from one of the pharmaceutical company’s offices. He can work from home if necessary but must spend the majority of his working week in the office as well as travelling across the UK to attend company meetings and events when required. As part of his role Vasilis assesses the performance of a team of staff who work for the pharmaceutical company.

Vasilis receives an email about off-payroll working rules from the finance department of the company but does not think it applies to him. He wonders if the company would approach all contracts in a similar way and make a blanket assessment for all contractors, but finds it doesn’t work like that, that status is determined on a case-by-case basis. He is then contacted by the finance department of the company and provided with a Status Determination Statement. This explains that his employment status for tax will change due to the off-payroll working rules (IR35).

Actions taken

Vasilis researches off-payroll working rules so that he can better understand how he will be affected. He goes to GOV.UK and is directed to use the CEST tool. After answering all of the questions the result indicates that he is affected by the off-payroll working rules and considered to be an employee for tax purposes. He contacts the finance department to discuss his results and what this will mean to his contract.

How the off-payroll working rules (IR35) apply

Vasilis is affected by off-payroll working rules changes for a number of reasons, including:

• the company control where he works
• he has management responsibilities
• his contract means he is unable to take on other work alongside his role

Outcome

He is now set up on PAYE. This means the pharmaceutical company will deduct income tax and NICs before paying him, as well as paying employer’s NICs. Vasilis’s contract runs for another 5 months as planned, after which he moves on to work for another company on an extendable contract.

Vasilis’s PSC is still required to submit a tax return, but relief is available on the tax already paid.

The hirer’s point of view

Situation

Andrew has worked in the finance department for the same large pharmaceutical company for 12 years. He learns about the changes to off-payroll working rules (IR35) in a letter from HMRC. Andrew approaches senior management to discuss how these changes should be communicated and put into effect.

Issue

Andrew is allocated, as one of a number of colleagues, to research and identify which contracted workers will be affected by the changes. The team look at a number of resources on gov.uk and familiarise themselves with the CEST tool before communicating with contracted workers within the company.

Actions taken

They send out emails to all contractors to explain how and when the changes will come into effect. They then use the CEST tool on a case by case basis to determine who will be affected and contact them individually. They send out Status Determination Statements to all contractors who are affected by the off-payroll working rules.

How the off-payroll working rules (IR35) apply

One worker who Andrew contacts is Vasilis, a risk management consultant working in Cardiff. Andrew discusses Vasilis’s results with him. Vasilis now understands that he is affected by off-payroll working rules for a number of reasons including:

• the company control where he works
• he has management responsibilities as he assesses the performance of a team

Outcome

Andrew sets Vasilis up on PAYE. Vasilis’s contract continues to be extended on a rolling basis for the next 5 months, after which he leaves to take on a new role elsewhere.

Example 4: contractor working for multiple clients

Topics covered:

• working for multiple clients
• off-payroll working rules (IR35) not applying
• working through a personal service company
• using the Check Employment Status for Tax tool

The contractor’s point of view

Situation

Susan is a 45-year-old web designer. She has been commissioned to design a new website for a medium-sized kitchen supplies business. She works through her own PSC, and the contract for this engagement is between the business and Susan’s PSC.

Susan is paid at agreed intervals through the 9-month project, on completion of work not on days worked. Susan is free to work for other non-competing clients during the course of the project.

Susan generally works from her own office location, visiting the client head office for meetings with the project team and key senior stakeholders.

Issue

Susan receives an email from her contact in the finance team at the business she is designing a website for about off-payroll working rules (IR35). It outlines that the business is looking at their contractor workforce to identify if these rules apply for each contract.

Actions taken

Susan researches the rules, finding out more information on GOV.UK. She understands that her client will have to decide whether or not her engagement is within the off-payroll working rules, and if her engagement is caught would need to issue her a Status Determination Statement. Susan receives an email from her client, confirming that they believe the rules do not apply, so nothing needs to change.

How the off-payroll working rules (IR35) apply

Susan is found to be outside of the scope of the off-payroll working rules for a number of reasons, including:

• Susan is paid for work completed not by the day
• she works at a location of her choosing
• she can work for multiple clients

Outcome

Susan continues to be responsible for accounting for and paying tax through Corporation Tax Self-Assessment (CTSA) and Income Tax Self-Assessment (ITSA).

The hirer’s point of view

Situation

Ahmed works in the finance department of a medium-sized kitchen supplies business. For the last 5 years he has been responsible for the contracts of contractors engaged by the business.

Issue

He has heard about changes to off-payroll working through HMRC and, following a webinar on the subject, he visits GOV.UK and looks at the CEST tool and guidance available online.

Actions taken

Ahmed and his colleagues in the finance team conduct a review of all the company’s contractors to identify those where the off-payroll rules may apply. Ahmed’s company use HMRC’s CEST tool for each contractor on a case by case basis to determine if the rules apply.

The rules are found to apply to some of the company’s contractors, so they issue Status Determination Statements to these contractors and their agencies as required.

How the off-payroll working rules (IR35) apply

For Susan’s contract, Ahmed determines that the off-payroll working rules do not apply, so the contract continues as it is.

Outcome

Ahmed sends Susan an email, confirming that he does not believe the rules apply to her engagement and that Susan must remain responsible for accounting her own tax.