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A contractor's guide to the off-payroll working rules

Recent adjustments to the off-payroll rules have resulted in major changes for contractors supplying their services through limited companies. This guide offers a concise overview of the rules and how they apply.


What are the off-payroll payroll rules?

The off-payroll rules were introduced to prevent workers, who would otherwise be classed as employees, working through limited companies for the purpose of paying lower taxes. As off-payroll workers are paid through their own intermediary, typically through their own limited company, they pay Income Tax and National Insurance contributions (NICs) through a combination of salary and dividends.

Previously, contractors earning a rate of £220 per day or more or on contracts of more than six months had to provide assurances to the relevant public sector body that they are outside of IR35. However, the government believes that widespread non-compliance with the off-payroll rules was costing the exchequer £1.3bn a year in lost tax revenue.

In April 2017, the government introduced new rules that transferred the responsibility for determining employment status from the contractor to the public authority or agency responsible for paying the worker’s fees. In October 2018 it was announced that from 2020 these rules would also apply to private sector firms with more than 250 employees.


Who needs to consider the off-payroll rules?

Anyone working through their own limited company, or similar, needs to consider the off-payroll rules. Although the rules currently only apply to contractors supplying their services to a public sector authority (as defined by the Freedom of Information Act 2000), those working in the private sector through their own limited companies should also begin to familiarise themselves with the rules in preparation for 2020.


How do the off-payroll working rules work?

At the start of a contract, the engager will use HMRC’s online employment status tool, or something similar, to determine whether the rules apply. HMRC’s CEST tool attempts to determine the workers employment status with questions relating to their working practice while engaged on a contract. These questions broadly relate to the key concepts of Control, Substitution and Mutuality of Obligation:

  • Supervision, Direction and Control (SDC): Does the worker exercise control over when, where and how the work is carried out?
  • Personal Service and Substitution: Is the working arrangement a personal one, or does the contractor have the right to provide a substitution?
  • Mutuality of Obligation (MoO): Is there an obligation from the client to provide consistent and paid work, along with an obligation from the worker to personally carry out this work?


Variations and exceptions to the off-payroll rules

If you work in the construction industry, you’ll need to apply specific rules in order to stop tax and NICs being paid twice on the same earnings within the Construction Industry Scheme and off-payroll working rules.

If you’re a foreign national who provides services through an intermediary based in the UK, you’ll need to check if the off-payroll working rules apply.

The off-payroll working rules won’t apply if the agency, umbrella company or similar third party that supplies the worker directly employs them and deducts Income Tax and NICs at source.


What happens when the off-payroll rules apply?

If the engager decides the new rules apply, then they will deduct tax and NICs from the contractors’ VAT exclusive fee before payment is made and the contractor is treated as receiving a deemed employment payment.

For tax and NICs purposes, the worker is treated as having an employment with the fee payer, so once the contract ends they will be given a P45. The relevant pay and tax details will then be entered on the contractor’s employment self-assessment tax return.

A Limited Company will still be able to make pension contributions on behalf of the contractor with relief being obtained through the company.

Whilst the 5% allowance to cover unspecified expenses has been removed, the limited company can still claim tax-allowable business expenses that could be claimed by an employee working directly for a public sector organisation.


What are the Penalties for not following off-payroll working rules?

In the private sector, the contractor is currently liable for any penalties. If you haven’t applied the off-payroll rules correctly you can be charged interest and penalties on any Income Tax or NICs owed. If you think the rules should have been applied to previous contracts, HMRC advises contacting them immediately, as a voluntary disclose is treated with more leniency. HMRC can go back up to six years to determine liability. If the new off-payroll rules are introduced to the private sector in 2020, liability for unpaid tax, NICs and penalties will transfer to the private sector end client.

In the public sector, liability rests with the public organisation who is paying the contractor. These taxes can be backdated as far as 6th April 2017.


Impact summary of the off-payroll rules

Although HMRC has steadfastly maintained that the reforms have improved compliancy, unanimous feedback from tax experts, economists and financial bodies indicates a generally negative impact on the public sector. Concerns over liability led to blanket rulings in the public sector that automatically classified contractors as inside IR35. Forced to work through umbrella companies rather their own limited companies, many contactors were taxed as an employees while receiving none of the associated statutory benefits. Faced with this unfavorable position, 27% of public sector contractors left, leaving organisations like the NHS short of contingent staff.

There have also been ongoing problems with the government’s online self-assessment tool, CEST. In many cases, the tool has provided insufficient or contradictory guidance on key determinants relating to the contractor’s employments status. This has resulted in an increase in tax tribunals with HMRC on the losing side in 75% of these cases. There’s strong evidence to suggest that the off-payroll rules need major reform before being rolled out to the private sector in 2020. The government has said that they will work with business to ensure there is improved support and guidance for implementing the off-payroll rules in the private sector in 2020.

To receive free and impartial guidance on your contracting career call a member of our team on 0203 642 8679

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