Off-Payroll Working for Clients and Agencies

When you hire contractors who work through their own limited company or other intermediary, the off-payroll working rules (also known as IR35) determine who is responsible for deducting tax and National Insurance. If you're a client or agency in the supply chain, you need to understand your...

Who the rules apply to

The off-payroll working rules apply when you engage a worker through their own intermediary (usually a personal service company) and that worker would be classed as an employee if they worked for you directly.

As a client, the rules apply to you if you are:

Any public sector organisation
A medium or large private or voluntary sector organisation

Private and voluntary sector organisations count as medium or large if they meet 2 or more of these conditions:

Annual turnover of more than £10.2 million
Balance sheet total of more than £5.1 million
More than 50 employees

You should check these conditions for the financial year in which your companies accounts filing period ended, before the beginning of the tax year concerned.

A simplified test applies if you're not a company, limited liability partnership, unregistered company, or overseas company. In this case, you must apply the rules if your annual turnover exceeded £10.2 million in the last calendar year.

If a parent company in a group is medium or large, all subsidiaries must also apply the off-payroll working rules. Group figures are combined when determining the parent's size.

Responsibilities for small private sector clients

If you're a small-sized client in the private or voluntary sector, you do not need to determine employment status. The worker's intermediary remains responsible for deciding whether the rules apply.

However, you must confirm your size if asked by the person or organisation you contract with, or by the worker themselves.

Client responsibilities for medium, large and public sector organisations

If the rules apply to you, you must determine the employment status of every worker who operates through their own intermediary, even if they come through an agency.

Use HMRC's Check Employment Status for Tax tool to help decide whether the off-payroll working rules apply to each contract. The rules apply on a contract-by-contract basis, so a worker may have some contracts inside the rules and others outside them.

If you decide the contractor should be treated as employed for tax purposes, you must produce a Status Determination Statement (SDS). While there's no legal format, best practice is to set this out in writing through an email, letter, or online.

Your Status Determination Statement must:

State your conclusion
Explain the reasons for reaching it
Be passed to both the worker and the person or organisation you contract with

You must take reasonable care when making determinations.

The labour supply chain and deemed employer

The labour supply chain is the chain of separate contracts between each party, from the client down to the worker's intermediary. A contract can be written, verbal, or implied.

If there are agencies or other parties between you and the worker's intermediary, you should pass the SDS down the chain. Each party should pass it on until it reaches the party immediately above the worker's intermediary (known as the fee-payer).

The deemed employer is the qualifying person at the lowest point in the labour supply chain who possesses the SDS. A party only becomes the deemed employer once they've received the SDS.

To qualify as a deemed employer, an organisation must:

Be resident in the UK, or have a place of business in the UK
Pay an intermediary that is controlled by the worker or their associate
Not be controlled by, or have a material interest held by, the worker or their associates

If you receive an SDS but don't pass it on, you become the deemed employer and remain so until you pass the determination down the chain.

If no party in the supply chain meets the qualifying conditions, the client remains the deemed employer.

The client is responsible for deducting Income Tax and employee National Insurance contributions, and paying employer National Insurance contributions, until they share the SDS with both the worker and the person or organisation they contract with.

Deemed employer responsibilities

If you are the deemed employer, you must:

Calculate the deemed direct payment (see below)
Deduct Income Tax and employee National Insurance contributions from the payment to the worker's intermediary
Pay employer National Insurance contributions on top of the payment (this cannot be deducted)
Report to HMRC through Real Time Information using a Full Payment Submission
Use the 'off-payroll worker subject to the rules' indicator in your payroll software
Apply the Apprenticeship Levy if applicable

Employment Allowance cannot be used against payments to deemed employees.

You can operate a separate PAYE scheme for these workers or add them to your existing payroll.

What deemed employers are not responsible for

You do not need to deduct student or postgraduate loan repayments. The worker accounts for these through their own tax return.

Off-payroll workers are not entitled to:

Statutory payments (such as sick pay or maternity pay)
Automatic enrolment into your pension scheme
Employment rights such as holiday pay

These entitlements come through the worker's employment with their own intermediary.

Calculating deemed direct payments

The deemed direct payment is the amount that should be treated as earnings for tax purposes. Calculate it as follows:

1. Start with the value of the payment to the worker's intermediary, excluding VAT

2. Deduct the direct costs of materials used in providing the services

3. Deduct expenses met by the intermediary that would have been deductible if the worker was directly employed

The result is the deemed direct payment. If it's nil or negative, there is no deemed direct payment.

You then deduct Income Tax and employee National Insurance contributions from this deemed direct payment. Employer National Insurance contributions must be paid on top and cannot be deducted from the payment to the intermediary.

Agency responsibilities

An agency is any party in the contractual chain between the client and worker's intermediary. There can be several agencies in a supply chain.

If you're an agency supplying workers through their own intermediaries to public sector clients or medium and large-sized private sector clients, you have responsibilities under the off-payroll working rules. This applies even if you're a small-sized agency.

If you're not the deemed employer, you're responsible for passing the Status Determination Statement down the supply chain.

If you don't receive an SDS, pass on payment without deducting Income Tax and National Insurance contributions. You can ask why you didn't receive it. This may be because the client is small and doesn't have to make determinations, or because the worker has been deemed outside the rules.

First agency in the chain

If you're the first agency the client contracts with, consider carefully who you enter into contractual arrangements with to provide labour.

Liability may transfer back to you if HMRC cannot collect outstanding Income Tax or National Insurance contributions from parties below you in the chain, particularly if they've dissolved for reasons other than genuine business failure.

Be aware that some schemes wrongly claim to get around the off-payroll working rules.

Record keeping and compliance

As a client subject to the rules, you must:

Keep detailed records of all employment status determinations, including reasons and fees paid
Have processes in place to deal with disagreements from workers about your determination
Keep records of contractors you engage, including names and addresses of both the contractor and their intermediary

Workers and agencies can challenge your status determination if they think it's wrong.

Overseas clients and contracted-out services

If your organisation is based wholly overseas with no UK connection (no UK residence or permanent establishment), the off-payroll working rules don't apply. The worker's intermediary determines whether the rules apply.

If you receive contracted-out services from a third party like an outsourcing company, applying the off-payroll working rules is the responsibility of that organisation, not yours. However, take care that contracts haven't been relabelled to avoid the rules.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.