Find out about the off-payroll working rules (IR35) if you're contractor or an intermediary and your worker provides services to small clients outside of the public sector.
The off-payroll working rules changed from 6 April 2021. Find out how the new rules apply to intermediaries and contractors.
- apply if a worker provides services to a client through an intermediary, but would be classed as an employee if they were contracted directly
- make sure that workers pay broadly the same tax and National Insurance contributions as an employee
An intermediary is a party who makes arrangements for, or pays, an individual to work for a third party.
The 3 different types of intermediary that workers can provide their services through are:
- a limited company, usually known as a personal service company (PSC)
- a partnership
- an individual through a non-corporate relationship – also known as an ‘unincorporated body’
A PSC is a type of intermediary where the worker has a ‘material interest’ in a company. This usually means the worker is either:
- the director of the company
- able to control more than 5% of the ordinary share capital of the company, directly or indirectly
Where the worker provides services to a small client outside the public sector, the off-payroll working rules will apply to a worker’s intermediary.
Where the worker provides services to a public sector client, or to a medium or large-sized client outside the public sector, different rules apply.
Working through an umbrella company
The off-payroll working rules are unlikely to apply if you are employed by an umbrella company.
Find more information on what umbrella companies are and what they mean for you.
What you need to do
An intermediary is usually a limited company and will often be a worker’s personal service company. It could also be a partnership, managed service company or an individual.
As the intermediary you will need to make an employment status determination for the worker to see if the off-payroll working rules will apply.
If the rules apply you’ll need to calculate a ‘deemed employment payment’. This is the amount deemed to be the income of the worker, after some deductions and employer National Insurance contributions have been removed.
The off-payroll working rules are considered for each engagement your worker enters into. If during an engagement there is a change in the terms then you’ll need to reconsider if the rules continue to apply.
If the rules apply, you’ll need to:
- pay the employer National Insurance contributions to HMRC
- pay any tax and the employee National Insurance contributions due, at the end of the tax year
- take into account the deemed employment payment when paying Corporation Tax, paying dividends or operating the Construction Industry Scheme
Your worker will need to report information about these engagements to HMRC on their Self Assessment tax return. They also need to pay any other Income Tax and National Insurance contributions that are due.
Check if you need to calculate the deemed employment payment
You need to work out how much you:
- received in the tax year from engagements where the off-payroll working rules apply
- paid your worker as employment income
If the amount you paid your worker as employment income for off-payroll working engagements is equal to the amount you received for their off-payroll working engagements in the tax year, you do not need to calculate the deemed employment payment.
You also do not need to calculate the deemed employment payment if you paid the worker more employment income than the amount you received for their off-payroll working engagements in the tax year.
Calculate the deemed employment payment
To calculate the deemed employment payment, you’ll need details of:
- the payments you received
- payments made to the worker such as salary or benefits in kind
- pension contributions made on behalf of the worker
- expenses you pay
You can find more information on what costs to include and deduct in the guide on how to calculate the deemed employment payment.
If you supply the services of more than one worker to a client under the same contract, you’ll need to calculate the deemed employment payment separately for each worker.
If a client makes a single payment to you for 2 or more workers for different engagements, the income received must be split proportionally.
If the deemed employment payment is a:
- negative number (or ‘0’) you do not need to pay any further Income Tax or National Insurance contributions, but you should keep evidence of your calculation and supporting information
- positive number you must pay Income Tax and Class 1 National Insurance contributions on this amount
You are responsible for paying the tax and the employer and employee Class 1 National Insurance contributions due on the deemed employment 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. You can also use the ‘Employer further guide to PAYE and National Insurance contributions’.
If you make salary payments to the worker during the year, report them to HMRC on a Full Payment Submission on or before the time of payment. If you do not make salary payments then return an Employer Payment Summary.
The deemed employment payment should be reported on a Full Payment Submission on or before 5 April each year.
You should include the deemed employment payment on a P60 form, which you must issue to employees by 31 May after the end of the tax year.
If you cannot accurately calculate the deemed employment payment by the end of the tax year, you will have until the following 31 January to submit final figures and pay any balance of tax and National Insurance contributions due.
This is provided you:
- report a provisional calculation of the deemed employment payment on a Full Payment Submission on or before 5 April
- make the appropriate payment of tax and National Insurance contributions to HMRC
- report final figures on an Earlier Year Update or further Full Payment Submission submitted on or before the 31 January following the end of the tax year
- pay a balancing payment of any additional tax and National Insurance contributions due by that date
In these circumstances, interest will be due on the balancing payment but not a late payment penalty. This concession on penalties will be reviewed annually and notice will be given if it’s to be withdrawn.
Self Assessment tax return
The deemed employment payment is treated as your worker’s employment income from you or a partnership. Your worker should include it with any other employment income on their Self Assessment tax return.
If your worker receives a salary from you, you’ll need to give them a P60 after the end of the tax year. The pay, tax and National Insurance contribution details on the P60 should include the deemed employment payment as well as tax and National Insurance contributions paid on it. Your worker should enter the total P60 pay, tax and National Insurance contributions figures on the employment page of their Self Assessment tax return.
If only a provisional amount of tax and National Insurance contributions have been paid to the worker, you should give your worker a revised P60 with the correct deemed employment payment by 31 January after the end of the tax year. Your worker should use the figures from the revised P60 on their Self Assessment tax return.
Calculate VAT and Corporation Tax
When you calculate Corporation Tax liability, deduct the amount of the deemed employment payment and Class 1 employer’s National Insurance contributions due on it. This deduction is only allowed when you calculate the taxable profits for the accounting period in which the deemed employment payment is treated as paid.
The fees you charge for providing services will be subject to VAT, even if the engagement is within the off-payroll working rules. This is because it’s still you that is contracting to provide service to a client, and as such the supply remains within the VAT regime.