The Off Payroll Working rules exist to cover situations where clients are effectively treating contractors as employees, but choose to utilise their work via their company, in order to avoid paying Employer’s National Insurance. By having these regulations in place, the aim is to ensure workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
Previously the rules were that the contractor (yourself), working through your own Personal Service Company, was responsible for reviewing the guidance and making the decision regarding your employment status. From April 2021, this is switching round such that Public sector clients and medium or large-sized Private sector clients will be responsible for deciding your employment status as a worker (see below for further requirements). There are no changes to the rules if your client is a small, Private sector client.
If it is deemed the Off Payroll Working rules apply to you, your income received via your Personal Service Company will be subject to PAYE tax and National Insurance Contributions before being paid to your company. This income will not be subject to corporation tax and can be withdrawn to a personal bank account. The income, and associated income tax already deducted, should be included on your personal tax return as employment income.
Public sector clients and medium or large-sized Private sector clients will need to determine your employment status as a worker, subject to the following:
If your client does not have a UK connection (i.e. they are not UK resident or do not have a permanent establishment in the UK), the April 2021 changes to the Off Payroll Working rules will not apply. Your own limited company should continue to consider whether the Off Payroll Working rules apply for your worldwide income for each contract.
You can use the Check Employment Status for Tax service to help you decide if the Off Payroll Working rules apply to a specific contract. The test considers the following issues to establish your employment status:
If your client does have a UK connection (i.e. they are UK resident or do have a permanent establishment in the UK), your client will need to decide if the rules apply, and what your employment status for tax is for each contract. They should communicate this to you via what is called a “Status Determination Statement” 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 National Insurance Contributions before they pay your company.
If your client determines that your contract is outside the Off Payroll Working rules, they will continue to pay your company gross, as before.
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.
Please note these changes do not affect whether you can continue to work through your own limited company. This will still be possible after 6 April 2021, however the way Income Tax and National Insurance Contributions are calculated and paid may change for some contractors, or some clients/ agencies may change the way they wish to engage you.
Finally, if you work through an Agency, the Agency should take reasonable care when making a decision about whether the Off Payroll Working rules apply and 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.
We understand this is a very detailed and complex area, so if you have any further thoughts or queries, please do not hesitate to contact us.