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Important facts for contractors - off-payroll working rules (IR35)

Updated 29 April 2021

1. The off-payroll working rules (IR35) have changed

The off-payroll working rules are designed to ensure individuals working like employees but through their own limited company (often known as a ‘personal service company’ or ‘PSC’), or other intermediary, pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed. These rules are commonly known as ‘IR35’.

On 6 April 2021, the off-payroll working rules changed.

For services provided to medium or large-sized client organisations outside the public sector, the changes apply to all payments made on or after 6 April 2021, for all services provided on or after 6 April 2021.

For services provided to public authorities, where the rules first changed in April 2017, the new changes apply to all payments made on or after 6 April 2021, regardless of when the services were provided.

2. HMRC will focus on supporting organisations to comply with the changes to the off-payroll working rules, rather than investigating contractor’s past arrangements

HMRC will not open a new compliance enquiry into a contractor’s return for tax years before 6 April 2021 in circumstances where:

• a client decides that a contract is within the off-payroll working rules (IR35)
• a contractor changes the way they work from providing and invoicing services through an intermediary entity to now being paid via a client or end user’s payroll
• a contractor ends a contract because they disagree with a client decision on status

This includes any decisions that clients may have made to prepare for the April 2020 changes, which were delayed.

The only reason HMRC will open an enquiry into a contractor’s return for tax years before 6 April 2021 using information acquired through the off-payroll working rules changes is if there is reason to suspect fraud or criminal behaviour.

If you have an ongoing compliance enquiry with HMRC, we will not ask for any information on decisions that clients may have already made or were in the process of making for the April 2020 changes, (which were delayed), as evidence for those ongoing enquiries.

Contractors can take reassurance from understanding that:

• HMRC took a similar approach to contractors in the public sector when the rules changed in 2017
• HMRC has never opened a compliance enquiry into a contractor’s compliance with the off-payroll working rules for tax years before 6 April 2017 using information acquired through the off-payroll working changes brought in by the 2017 reform

3. How you pay tax may have changed

If you contract for a medium or large-sized organisation outside the public sector

From 6 April 2021, your client is responsible for deciding your employment status for tax for the services you provide them. They should provide you with a ‘Status Determination Statement’ if the rules apply, setting out and explaining their decision.

If your client determines that your contract is inside the off-payroll working rules and so you are a deemed employee for tax purposes then your client, or the agency who pays your fees, will also be responsible for deducting Income Tax and Employee NICs before they pay you. They will also need to pay Employer NICs and apprenticeship levy, if relevant, to HMRC.

You may still need to submit a tax return, for example, if you are a student loan or post graduate loan borrower, but relief is available on the tax already paid.

For the tax year 2020 to 2021, your limited company or other intermediary remains responsible for operating the off-payroll working rules and accounting for and paying the relevant Income Tax and NICs.

If you contract for a public authority

Your client is already responsible for determining your employment status for tax and they will continue to be responsible. Now they should provide you with a ‘Status Determination Statement’ setting out their decision about whether the off-payroll working rules apply.

If you contract for a small non-public sector organisation

Your limited company or other intermediary will remain responsible for determining whether your contract is inside the off-payroll working rules, and accounting for and paying the relevant Income Tax and NICs.

If you are not sure if your client is small, you have the right to request information from them about the size of their organisation.

4. Clients cannot apply a blanket status assessment across all contractors

Your client must take reasonable care when making a decision about whether the off-payroll working rules apply.

Applying a decision to a group of off-payroll workers with the same role, working practices and contractual terms may be permissible in some circumstances, but it is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working arrangements.

It is normal that businesses will consider whether limited companies or other intermediaries are the best way to engage you, and other contractors. This is a business decision for organisations to make, and organisations will be free to decide how they engage their workers.

Some organisations might decide to offer you a role as an employee, or through an agency or umbrella company rather than directly, while other organisations may choose to continue engaging you through your own limited company where this suits their business model.

5. Disputing a decision

If you disagree with the decision made by your client on your employment status for tax, you will be able to raise your concerns through your client’s status disagreement process. All clients are required to introduce a process from April 2021 to allow you to disagree with their decision.

After completing the client’s status disagreement process, if you think you have paid too much Income Tax and NICs then you can follow existing routine Self Assessment and National Insurance processes. You can find further information in the Employment Status Manual. HMRC may ask for the documents and records you have relied on to conclude that a repayment is due.

6. Continuing to work through a limited company

These changes do not affect whether you can work through your own limited company, generally known as a ‘personal service company’, or ‘PSC’. This will still be possible, however the way the Income Tax and NICs are calculated and paid may change for some contractors, or some clients may change the way they wish to engage you and other contractors.

If you are changing the way you work and will no longer be working through your own limited company, you may need to consider what to do with your company (for example, you may want to close it down).

If you are thinking of working through an umbrella company, we have published guidance to help you understand what this means in practice.

7. Don’t get caught out by tax avoidance schemes

Most tax avoidance schemes don’t work, including those that may claim to be tax efficient or offer to increase your take-home pay. If something looks too good to be true, then it almost certainly is. Find out how to spot the warning signs of tax avoidance.

8. Contractors are not all self-employed

Your employment status for tax, whether you are employed or self-employed, is not a matter of choice. It depends upon the terms and conditions of a contract and your actual working practices. The fact that you supply your services through your own limited company is not necessarily relevant to whether you are employed or self-employed for tax purposes.

For example, if you work predominantly for the same client, at their premises and following their policies and procedures, you cannot send a substitute to work on your behalf and would require permission to seek additional work elsewhere then you are more likely to resemble an employee.

The rules only apply to employment status for tax purposes, and do not apply to employment status for rights.

9. The rules do not apply to those that are self-employed

The off-payroll working rules only apply to individuals who are working like employees under the current employment status tests for tax, and do not apply to the self-employed.

Individuals who operate their own business structure and do not work in the same way as an employee, for example they have their own business premises, employ other workers or work for a wide range of clients, continue to be outside of the scope of the off-payroll working rules.

In these circumstances they will continue to be responsible for paying tax through Corporation Tax Self Assessment (CTSA) and Income Tax Self-Assessment (ITSA).

10. Get additional help and support

HMRC continue to provide help and support for contractors to understand the rules. Information about the support available, including webinars, can be found on HMRC’s help and support page for off-payroll working.