Check if you’re the deemed employer and what your responsibilities are if the off-payroll working rules (IR35) apply.
The off-payroll working rules make sure that workers, who would be classed as an employee if they were contracted directly, pay broadly the same Income Tax and National Insurance contributions as employees.
The off-payroll working rules can apply if a worker provides their services through an intermediary (usually a limited company). A worker is sometimes known as a contractor.
If the off-payroll working rules apply, the fee-payer is usually responsible for:
- deducting Income Tax (PAYE) and employee National Insurance contributions, and paying these to HMRC
- paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC
The fee-payer is the party paying the worker’s limited company or other intermediary for the worker’s services.
The fee-payer will also be the organisation directly above the worker’s limited company in the labour supply chain. This could be the client or an agency.
When the rules apply
The rules changed for the public sector in April 2017 and for medium and large-sized organisations outside the public sector on 6 April 2021.
For clients who are medium or large-sized organisations outside the public sector, the rules only apply for payments made on or after 6 April 2021 for work carried out on or after this date.
For public sector clients, the new rules from 6 April 2021 apply for payments made on or after 6 April 2021 regardless of when the work was carried out.
If a worker provides services to a small client outside the public sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
The rules about size only apply to clients. If you are a small-sized agency who is the deemed employer you will still be responsible for applying the off-payroll working rules.
The client will need to pass the worker’s employment status determination to the agency or other organisation they contract with.
The responsibility for deducting Income Tax and employee National Insurance contributions, and paying employer National Insurance contributions, is the clients until they tell the worker and the person or organisation they contract with of the determination and the reasons for it.
A contract for the purpose of the off-payroll working rules is a written, verbal or implied agreement between parties.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.
The determination should continue to be passed on, until it reaches the party immediately above the worker’s intermediary (usually a limited company). This party is known as the fee-payer. If certain conditions are met, the fee-payer may also be the deemed employer.
The deemed employer is the person who is responsible for:
- deducting Income Tax and employee National Insurance contributions and paying these to HMRC
- paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC
This may be the same person as the fee-payer, but it may be another person in the labour supply chain if the fee-payer does not meet the qualifying conditions.
The labour supply chain is the chain of separate contracts between each party, from the client to the worker’s intermediary.
If the rules apply, the deemed employer is then responsible for deducting Income Tax and employee National Insurance contributions and paying these to HMRC. The deemed employer is also responsible for paying employer National Insurance contributions and Apprenticeship Levy, if applicable, on top of the payment to the worker’s intermediary. This cannot be deducted from the payment to the worker’s intermediary.
If a party in the labour supply chain receives the status determination statement, but does not pass it on, they will become responsible for deducting Income Tax and employee National Insurance contributions and paying these to HMRC. They will also become responsible for the employer National Insurance contributions and Apprenticeship Levy.
This party will remain the deemed employer until the determination is passed on.
Check if you’re the fee-payer
In most cases the organisation paying a worker’s intermediary will be the fee-payer.
To be a fee-payer, you must be the lowest party in the labour supply chain. This is usually the party paying the worker’s intermediary.
As a fee-payer you must meet the following qualifying conditions:
- be resident in the UK, or have a place of business in the UK
- pay an intermediary that is controlled by the worker or associate of the worker
- not be controlled, or material interest not be held, by either:
- a worker, alone or with one or more associates of a worker
- an associate of a worker, with or without other associates
You should not deduct Income Tax and employee National Insurance contributions, or pay employer National Insurance contributions or Apprenticeship Levy, if applicable, as responsibility will pass to the next party above you in the labour supply chain, if you do not:
- meet the qualifying conditions
- receive the determination
You may want to ask the client or agency immediately above you in the labour supply chain why you have not received a status determination. If you are the agency the client contracts with, you can ask the client to confirm its size.
If no other party in the supply chain meets the conditions, the client becomes responsible.
Your responsibilities as the deemed employer
When you receive the worker’s employment status determination and the off-payroll working rules apply, you must:
- calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
- deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
- pay employer National Insurance contributions
- report to HMRC through Real Time Information the Income Tax and National Insurance contributions deducted
- use the ‘off-payroll worker subject to the rules’ indicator in PAYE Real Time Information (the name of this indicator may be shown differently in your software
- apply the Apprenticeship Levy and make any payments necessary
Employment allowance cannot be used against payments to deemed employees.
You can check further guidance on operating PAYE.
How to calculate deemed direct payments
The deemed direct payment is the amount paid to the worker’s intermediary that should be treated as earnings for the purposes of the off-payroll rules.
Work out the value of the payment to the worker’s intermediary, having deducted any VAT.
Deduct the direct costs of materials that have, or will be, used in providing their services.
Deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.
You then need to deduct Income Tax and employee National Insurance contributions as appropriate from the deemed direct payment. You also need to pay employer National Insurance contributions. Employer National Insurance contributions cannot be deducted from the deemed direct payment.
You’ll need to report the pay and deductions you make to HMRC using a Full Payment Submission, as you do for workers on your payroll. You should indicate that this person is an off-payroll worker.
You do not have to add these workers to your existing payroll, but you can do this if you wish. If the payments are not reported under your existing PAYE scheme, then you’ll have to open a new one.
You should keep records of any payments as well as amounts of Income Tax and National Insurance contributions deducted.
Read more about how to calculate the deemed employment payment.
How much Income Tax and National Insurance contributions must be paid
You should give the worker a new starter checklist. This will decide the worker’s tax code. The Income Tax code will often be code ‘BR’, as the worker will have a primary employment with their own intermediary.
You must use the normal National Insurance rates and thresholds on the value of the deemed payment.
To work out how much Income Tax and National Insurance contributions need to be paid on the deemed employment payment, you can use either:
- your payroll software
- Basic PAYE Tools
How to correct errors
Use your PAYE software if you need to correct an error you’ve made on a previous PAYE or Real Time Information submission, as you would with any other mistake.
What you are not responsible for
Student or postgraduate loan repayments, holiday pay, statutory payments and auto-enrolment
You are not responsible for deducting student or postgraduate loan repayments for workers engaged through their own companies. The worker will account for student or postgraduate loan obligations in their own tax return.
As the worker is not one of your employees they are not entitled to:
- statutory payments
- be automatically enrolled into a pension
The worker’s entitlement to statutory payments comes through their employment with their intermediary. They can also contribute to a pension as an employee of their intermediary.
Workers providing services through intermediaries are also not entitled to employment rights from you, such as holiday pay.
If you disagree with a status determination
From 6 April 2021, if you are the deemed employer you can challenge a status determination if you think it’s wrong. The worker can also challenge the determination.
The client who made the determination will need to have processes in place for dealing with disagreements about determinations they make.
If you disagree, you must explain the reasons why you think the client’s determination was wrong. You can provide any evidence you feel supports the reasons for your disagreement.
You will need to write to the client to give reasons why you disagree.
This should include details of:
- the employment status determination they disagree with
- their reasons for disagreeing
Keep copies of any records about disagreements.
The client will need to:
- consider any further information that you provide to them and reconsider the employment status determination
- decide whether to maintain the determination because they feel it is correct and give reasons why, or withdraw the determination because they feel it was wrong
- respond to you within 45 days of receiving your disagreement
- confirm which date the determination is valid from
You can raise a disagreement to the client until the last payment is made for the worker’s services.
The client will continue to apply the rules in line with their original determination until they respond.