Policy paper

Off-payroll working rules from April 2021

Published 3 March 2021

Who is likely to be affected

Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.

Medium and large-sized client organisations in the private and voluntary sectors that engage individuals working through PSCs. Public sector client organisations will also be affected by the changes to improve the operation of the reform.

Recruitment agencies and other intermediaries supplying staff working through PSCs.

General description of the measure

The off-payroll working rules have been in place since 2000 to ensure fairness between individuals who work in a similar way. They are designed to make sure that an individual who works like an employee but through their own limited company (such as a PSC) pays broadly the same Income Tax and National Insurance contributions (NICs) as other employees. The rules do not apply to the self-employed.

This measure will apply to engagements with medium or large-sized client organisations in the private and voluntary sectors. It will shift responsibility for operating the off-payroll working rules from the individual’s PSC, to the client organisation or business to which the individual is supplying their services.

This includes responsibility for deciding whether the rules should apply and ensuring that the associated employment taxes and NICs are deducted, where appropriate. Public sector client organisations who are already responsible for deciding whether the rules apply will be affected by some new requirements, such as issuing a Status Determination Statement, which should include the reasons for the status decision.

Engagements with small client organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses.

A 5% allowance is currently available to PSCs to reflect the costs of administering the off-payroll working rules. Because responsibility is shifting from the PSC to the organisation receiving the individual’s services, this allowance will be removed from 6 April 2021 for those engagements with medium and large-sized organisations in the private and voluntary sectors.

The allowance will continue to be available to PSCs for engagements with small organisations outside the public sector.

Provisions to allow for the transfer of liability and the passing of information through labour supply chains will also be included.

These provisions will also apply to public sector client organisations who are already responsible for deciding whether the rules apply.

Policy objective

The off-payroll working rules are designed to ensure fairness between individuals working in a similar way.

To increase compliance with the existing off-payroll working rules in the private and voluntary sectors, medium and large-sized client organisations will become responsible for assessing an individual’s employment status and ensuring the right tax and NICs are deducted and accounted for.

The measure will also improve the way the rules operate in the public sector, where client organisations are already responsible for determining whether the rules apply.

Background to the measure

In April 2017 the government reformed the rules so that public sector client organisations who take on contractors are responsible for making sure they and their workers pay the right amount of tax.

This has proved to be effective in improving compliance. Analysis of tax returns suggests that the reform increased overall Exchequer revenues by £250m in the first 12 months, and a further £275m in the second 12 months.

At Autumn Budget 2017, the government announced plans to carefully consult on how to tackle non-compliance in the private sector. Following a 12 week consultation published in May 2018, the government announced at Autumn Budget 2018 that it would extend the public sector reform to all engagements with medium and large-sized client organisations. To give people and businesses time to prepare, it was announced that this change would not be introduced until April 2020.

HMRC consulted on the detail of the reform between 5 March and 28 May 2019 and in April 2019 published guidance on the actions client organisations can take to prepare for the reform. The government published draft legislation on 7 July 2019 and conducted a review of the implementation of the reform in January 2020 to determine if any further steps could be taken to ensure the smooth and successful implementation of the reform, publishing its findings on 27 February 2020.

Since Autumn 2019 HMRC has been providing support and education to customers through a range of channels to ensure that organisations and contractors are prepared for the changes.

At Spring Budget 2020, the government announced that the introduction of the reform would be delayed until 6 April 2021 in response to the impacts of coronavirus (COVID-19). Provisions were introduced as a government amendment to Finance Bill 2020 with the revised implementation date.

This Tax Information and Impact Note (TIIN) updates and replaces the TIIN published on 11 July 2019.

Detailed proposal

Operative date

This measure will have effect for contracts entered into, or for payments made for work carried out, on or after 6 April 2021.

Current law

Current law is included in Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Part 2 Chapter 8, sections 48 to 61, (ITEPA 2003), Part 2 Chapter 10, sections 61K to 61X and the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000 No 727).

Proposed revisions

Changes to legislation received Royal Assent as part of Finance Act 2020, which amended Chapters 8 and 10 in ITEPA 2003 (as well as making other consequential amendments).

Further aspects of the changes are set out in the Income Tax (Pay as You Earn) (Amendment No. 3) Regulations 2020 (amending the Income Tax (Pay as You Earn) Regulations 2003) and the Social Security Contributions (Intermediaries) (Miscellaneous Amendments) Regulations 2020 (amending the Social Security Contributions (Intermediaries) Regulations 2000).

The combined revisions will mean that where an individual works for a medium or large-sized client organisation outside of the public sector, through their own PSC and falls within the rules:

• the party paying the individual’s PSC (the “fee-payer” or “deemed employer”) is treated as an employer for the purposes of Income Tax and Class 1 National Insurance contributions
• the amount paid to the individual’s PSC for the individual’s services is deemed to be a payment of employment income, or of earnings for Class 1 National Insurance contributions for that individual
• the party paying the worker’s intermediary (the “fee-payer”) is liable for secondary Class 1 NICs and must deduct tax and NICs from the payments they make to the worker’s intermediary in respect of the services of the worker
• the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using Real Time Information (RTI) returns

A technical change to the off-payroll working rules will be made in Finance Bill 2021, to ensure the legislation operates as intended from 6 April 2021 for engagements where an intermediary is a company. The change will not affect the content of this Tax Information and Impact Note.

Further information about this change can be found in technical changes to make sure the off-payroll working legislation operates as intended.

Summary of impacts

Exchequer impact (£m)

2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026
+30	+1,020	+590	+650	+725	+805

These figures are set out in Table 2.2 of Budget 2021 and have been certified by the Office for Budget Responsibility. These figures update and combine 2 previous costings. More details about those costings can be found as follows:

• in the policy costings document published alongside Budget 2018, under the heading “Off-payroll Working: extend reforms to private sector in 2020-21, excluding small businesses”
• in the policy costings document published alongside Spending Review 2020, under the heading “Off-Payroll reform: delay extension of the reform to the private and voluntary sectors by one year”

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

A behavioural adjustment has been made to the costing of extending the reform to private and voluntary sectors to account for taxpayers shifting their structure to mitigate tax changes.

The costing of the delay to the extension of the reform accounts for behavioural responses such as changes to businesses models in preparation for the reform, and attrition from taxpayers seeking to mitigate the effect of the changes.

Impact on individuals, households and families

This measure is expected to impact around 180,000 individuals working through their own company, who would be employed if engaged directly.

Those who are complying with the existing rules should feel little impact. The measure is targeted at individuals who are not compliant with the existing rules. These individuals will be required to pay tax at the correct levels and will therefore face additional tax liabilities.

For individuals who were previously non-compliant, the reform of the off-payroll working rules could have an impact on the disposable income available to them and their families.

Equalities impacts

This measure is not anticipated to impact on groups sharing protected characteristics.

Impact on business including civil society organisations

Due to the scope of the off-payroll working rules and the degree of change required by this reform, the impact on business and civil society organisations is expected to be significant, but varied, with some realising savings through reduced administrative requirements.

PSCs

There will be continuing savings for around 240,000 PSCs who will no longer have the requirement for determining status or associated accounting burdens. This figure includes PSCs operated by workers whose engagements will be outside the off-payroll legislation.

PSCs will also have the right to request confirmation of a client organisation’s size, which if exercised, may result in an administrative burden for the PSC.

Client organisations

Up to 60,000 client organisations outside the public sector are in scope of the reformed off-payroll working rules.

The majority of large client organisations, and a high proportion of medium-sized client organisations, who engage off-payroll workers do so through agencies. One-off costs for these client organisations could include familiarisation with the changes, upskilling staff in making status determinations and determining whether the rules apply to their existing off-payroll engagements.

Continuing costs could include making status determinations for any new off-payroll engagements, maintaining a status disagreement process for off-payroll workers who seek to challenge their status determination and responding to requests to confirm the client organisation’s size.

Client organisations that engage PSCs directly will be additionally responsible for deducting Income Tax and NICs and remitting it directly to HMRC for these engagements through Real Time Information returns.

Recruitment Agencies

This measure affects approximately 20,000 agencies who provide workers to medium and large-sized client organisations. They will need to operate payroll for any workers they supply who work through their own company (PSC) and fall within the scope of the rules. One-off costs could include familiarisation with the changes, upskilling staff and implementing processes that allow them to operate payroll on the payments made to PSCs.

Continuing costs for these agencies could include making status determinations for any new off-payroll engagements.

During the House of Lords Economic Affair Finance Bill Sub-Committee’s inquiry into the reform of the off-payroll working rules in 2020, HMRC committed to review its assessment of the administrative burden of the changes on businesses and individuals.

The revised assessment has increased one-off and continuing costs, whilst also increasing the estimated continuing savings of the reform.

Estimates of the costs are shown in the tables below:

Estimated one-off impact on administrative burden (£m)

One-off impact	(£m)
Costs	19.7
Savings	-

Estimated continuing impact on administrative burden (£m)

Continuing average annual impact	(£m)
Costs	8.4
Savings	8.7
Net impact on annual administrative burden	-0.3

Operational impact (£m) (HMRC or other)

The operational costs of implementing this measure are calculated to be in the region of £18.5m between the tax years 2018 to 2019 and 2025 to 2026.

Compliance teams will be providing extensive support and guidance to businesses to help them implement the off-payroll working rules and ensure they apply them correctly.

Other impacts

Other impacts have been considered and none has been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns and independent research which will be published.

Further advice

If you have any questions about this change, please contact the Off-Payroll Working Policy team at: offpayrollworking.legislation@hmrc.gov.uk.