Your role as a recruiter is multi-faceted and unless you’ve come from the industry, it’s hard to understand the level of skill it takes to juggle the daily workload; adding legislation into the mix can become quite cumbersome.
We’ll cover the main bases related to the implications of an assignment falling inside IR35 – pertinently - deemed employment payments and off payroll working rules.
Is my contractor inside IR35?
It is the onus of the public sector end hirer to provide you with the IR35 status of the contracts they want you to fill. This will apply to private sector end hirers from April 2021, provided they are not a small company
Private sector end hirers may currently not be au-fait with IR35 legislation and could need some help in determining the status of their assignment.
Working with an IR35 specialist will allow you to determine this in a quick, efficient and professional manner and provide you with expert advice.
What do I do if my contractor falls inside IR35?
If the contract review and the end hirer indicate that the assignment is inside IR35, the fee payer – the organisation who pays the personal service company (PSC) - will be responsible for the following:
- Deemed employment payments
- Deducting PAYE tax
- Deducting National Insurance
- Paying employers' National Insurance contributions
Making deemed employment payments if the end hirer is within the public sector:
If the contract is within the public sector, the fee payer is responsible for deducting PAYE and NI on 100% of the income from the contract. They are also responsible for making the employers’ NI payments.
Public authorities are responsible for deciding if off-payroll working rules apply in the public sector.
The person providing services through their own intermediary will need to provide information to the public authority to help them make their decision.
If the rules apply, the public authority, agency or other third party who is responsible for paying the worker’s intermediary must deduct tax and Class 1 NICs and pay and report them to HM Revenue and Customs (HMRC). – Gov.uk
Making deemed employment payments if the end hirer is within the private sector:
If the contract is within the private sector and inside IR35 (taking professional advice is highly recommended), the PSC will receive the gross payment from the recruitment agency and will be responsible for calculating the ‘deemed payment’. This means ensuring that 95% of the income from the contract is paid out as salary and employment costs. There is a 5% allowance to cover the expenses of running the business, usually accountancy fees.
“The person providing services through their own intermediary is responsible for deciding if the relevant rules apply for work in the private sector. They will also need to pay the tax and National Insurance due if the rules apply.” This practice is already in place.
Off payroll working rules and IR35
If your contractor is deemed off-payroll, our sister company ClearSky Accounting can easily assist you in determining all you need to know about off-payroll working rules with the in-house team of experts.
A worker is involved in off-payroll working when they work for an end hirer through their own intermediary, often a personal service company (PSC).
The full list of off-payroll working rules can be found here. Off-payroll working rules apply to a contract based off the employment status of the person providing their services and these rules aim to ensure that contractors that are in disguised employment pay the correct amount of tax.
April 2021 IR35 Changes to Private Sector and Public Sector
Three years after the April 2017 Public Sector reforms, what changes can we expect to see in April 2021?
The Public Sector notes some changes – such as:
- Introduction of a statutory client-led disagreement process, where, if the contractor or the fee payer disagrees with the Status Determination Statement (SDS) they can challenge this decision
- Debt transfer legislation - a new power for HMRC to collect unpaid PAYE from other parties in the supply chain.
The Private Sector reforms will mirror the public sector reforms of April 2017 – that is - the end hirer will be responsible for determining the IR35 status of the contract. The fee payer (the one responsible for payment to the PSC) will be responsible for deducting PAYE and both employees’ and employers’ NI contributions on 100% of the income from the contract. The contractor will lose the 5% for expenses.
When do off payroll working rules not apply?
According to HMRC, the off-payroll working rules won’t apply if a contractor chooses to have an umbrella company directly employ them. However, if the contractor is operating through a PSC - they will be subject to these rules and implications.
The agency, umbrella company or similar third party that supplies the worker directly employs them and deducts Income Tax and NICs. If the worker is engaged by the agency, umbrella company or similar third party through the worker’s intermediary then the off-payroll working rules may apply. (note; “an employment intermediary is a person or business who makes arrangements for someone to work for a third person. They are also often known as an ‘agency’ or ‘employment business’.”) - From gov.uk
Determining Off-Payroll working rules and deemed payments – top tips for recruiters
- Determine if the end hirer is within the public or private sector; this will help you decipher who the onus is upon to determine IR35 status. April 2021 will see private sector changes mirror public sector reforms, and all end hirers will be responsible for determining IR35 status – with the exemption of small companies
- Examine whether or not the off-payroll working rules apply, and advise the contractor on the best options available to them
- If the contract falls inside IR35 and within the public sector, calculate deemed employment payments, deduct PAYE tax and NI at source. Employers NI will also need to be paid
Another option would be for the contractor to become an employee of Parasol. This means the contractor becomes our employee, and the contractor will benefit from full employment rights. Parasol - as the employer - becomes responsible for deducting PAYE tax and national insurance, and IR35 will no longer be a matter to consider.
It’s important to remember that if the assignment falls inside IR35 and in the private sector, the worker is responsible for deciding whether to operate as a limited company or under an umbrella company. They should carefully consider the implications of making this choice, and the changes coming into effect in April 2021.
Seeking IR35 advice on the status of an assignment from Parasol will provide peace of mind and expert advice.
It is crucial to provide advice on how to fill assignments and contracts in a legal manner - compliant of HMRC’s rules and other legislation surrounding contractors specifically.
Visit our Recruiter section to provide you with advice and support.