Check if you’re the fee-payer and what your responsibilities are if the off-payroll working rules (IR35) apply.
The off-payroll working rules:
- apply if a worker provides their services through an intermediary, but would be classed as an employee if they were contracted directly
- make sure that workers providing services through an intermediary pay broadly the same tax and National Insurance contributions as an employee
When the rules apply
The rules currently apply to public sector clients. After 6 April 2020 medium and large private sector clients will also need to apply 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 determination should continue to be passed on, until it reaches the party immediately above the worker’s intermediary. This party is known as the fee-payer or deemed employer.
If the rules apply , the fee-payer is then responsible for deducting the tax and National Insurance contributions and paying these to HMRC.
If a party in the labour supply chain receives the employment status determination, but does not pass it on, they will become:
- the fee-payer
- responsible for deducting the tax and National Insurance contributions and paying these to HMRC
This will remain until the determination is passed on.
Who decides if the rules apply
This depends on if a worker is providing services for a client in the private sector or the public sector. The private sector includes third sector organisations, such as some charities.
Applying the rules depends on the result of the employment status determination of the worker.
Before 6 April 2020
In the public sector the client is responsible for deciding the employment status of a worker and telling the person they contract with.
In the private sector, a worker’s intermediary is responsible for deciding the worker’s employment status for each contract.
From 6 April 2020
Public sector clients will remain responsible for deciding if the rules apply.
Medium and large-sized private sector clients will be responsible for deciding a worker’s status and if the off-payroll working rules apply to them.
The client should pass the determination onto the worker and the person they contract with.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
The conditions about size only apply to clients. If you are a small-sized fee-payer you will still be responsible for applying off-payroll working rules.
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 person paying the worker’s intermediary.
As a fee-payer, you 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 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
As the fee-payer you should be given the worker’s employment status determination by the client or agency immediately above you in the supply chain.
If you do not receive the determination, you should pass on the payment without deducting taxes and National Insurance contributions. Before you do this you may want to ask the client or agency immediately above you in the labour supply chain to find out why you haven’t received a status determination.
Your responsibilities as the fee-payer
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 taxes and National Insurance contributions deducted
- apply the apprenticeship levy and make any payments necessary
Employment allowance cannot be used against payments to deemed employees.
The new rules apply to any payments made to the worker’s intermediary on or after 6 April 2020. This is the case even if the work was done before 6 April 2020.
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 tax and employee National Insurance contributions as appropriate from the deemed direct payment. You also need to pay employer National Insurance contributions.
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.
How much National Insurance contributions must be paid
You must use the appropriate National Insurance rates and thresholds on the value of the deemed payment.
You can use your payroll software or Basic PAYE Tools to work out how much tax and National Insurance contributions need to be paid on the deemed employment payment.
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 loan repayments, holiday pay, statutory payments and auto-enrolment
You are not responsible for deducting student loan repayments for workers engaged through their own companies. The worker will account for student 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, such as holiday pay.
If you disagree with a status determination
From 6 April 2020, you and the worker will be able to challenge a status determination if you think it’s wrong. 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 or your worker will need to write to the client to give reasons why they 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.
The client will continue to apply the rules in line with their original determination until they respond.