When to apply the off-payroll working rules (IR35) if you receive services from a worker through their intermediary.
The off-payroll working rules make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would.
The rules apply if the worker who provides services to a client through their own intermediary would have been an employee if they were providing their services directly to that client.
You are a client if you commission and receive services from a worker (even if that is through a third party). You may also refer to yourself as the engager, hirer or end client.
Who the rules apply to
As the client receiving a worker’s services, you need to be aware of the off-payroll working rules.
The rules apply to all public sector clients and medium and large-sized private and voluntary sector clients.
Private and voluntary sector clients
Private sector includes voluntary sector organisations, such as some charities.
Private sector companies and voluntary sector organisations are considered medium and large-sized if they meet 2 or more of the following conditions:
- have an annual turnover of more than £10.2 million
- have a balance sheet total of more than £5.1 million
- have more than 50 employees
Balance sheet total means the total gross amounts shown as assets in the company’s balance sheet before deducting any liabilities.
You need to consider these conditions for the financial year in which the period for filing your companies accounts and reports ended. You should do this before the beginning of the tax year concerned.
If you do not meet 2 or more of the conditions, and the simplified test and group rules do not apply, you will be classed as a small-sized client under the off-payroll working rules.
A simplified test applies to some clients who are not:
- a company
- a limited liability partnership
- an unregistered company
- an overseas company
In this case, you must apply the rules if you have an annual turnover of more than £10.2 million.
If you use the simplified test to determine your size, you must apply the rules from the start of the tax year following the end of the calendar year when you met the conditions.
If you do not use the simplified test your circumstances may later change. For example, if you incorporate your business or the business’ turnover increases. If you meet the simplified test conditions for 2 consecutive years, you must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.
There are also rules which cover connected and associated companies. If the parent of a group is medium or large-sized, their subsidiaries will also have to apply the off-payroll working rules.
When deciding if the parent is medium or large-sized you include all the figures from the group companies.
Small-sized private sector clients
If you’re a small-sized client in the private and voluntary sectors you will not have to determine the employment status of workers you engage through their own intermediaries. This will remain the responsibility of the worker’s intermediary. However, you must confirm your size if asked by the person or organisation you contract with, or the worker. This is to make sure that you, your agencies and your workers can consider what rules apply.
The off-payroll working rules apply to all public authorities such as:
- government departments, including their executive agencies
- companies owned or controlled by the public sector
- schools or universities
- local authorities
- parts of the National Health Service
The rules also apply to the:
- UK Parliament
- National Assembly for Wales Commission
- Northern Ireland Assembly Commission
You can find the definition of a public authority for the purposes of the off-payroll rules in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002 on legislation.gov.uk.
There are some differences between the off-payroll working rules definition of medical services providers and the definition in the Freedom of Information Act.
Hospitals, GP surgeries and dental practices will also need to check if the rules apply to their contracted workers. This includes contractors who are providing ophthalmic and pharmaceutical services for the National Health Service.
If you are a retail business providing ophthalmic and pharmaceutical services for the National Health Service you are not considered within the public sector for off-payroll rules. You will have to consider the rules as they apply to the private sector and consider if you are a medium or large-sized business. This includes if you are a high street pharmacy or opticians.
Contracted out services
An organisation receiving contracted out services from a third party, like an outsourcing company, will not have to apply the off-payroll working rules. This will be the responsibility of the organisation supplying a worker’s services.
You should take care to make sure that a contract has not been relabelled to avoid the off-payroll working rules. Read ESM10010 in the Employment Status Manual for guidance and examples of contracted out services.
When a client is overseas
If your organisation is based wholly overseas the off-payroll working rules do not apply. The worker’s intermediary will be responsible for determining if the rules apply.
Your organisation is classed as overseas if it does not have a UK connection. You will have a UK connection if you are resident in the UK or have a permanent establishment in the UK.
What you need to do as a client
You’ll need to decide the employment status of every worker who operates through their own intermediary, if they are not employed by another party in the supply chain, even if they are provided through an agency.
You should communicate your determination using a Status Determination Statement.
A Status Determination Statement must:
- be passed to the worker and the person or organisation you contract with
- give your conclusion and the reasons for reaching it
You must take reasonable care when making a determination.
The responsibility for deducting Income Tax and employee National Insurance contributions, and paying employer National Insurance contributions, is yours until you tell the worker and the person or organisation you contract with of your determination and the reasons for it.
If you contract directly with the worker’s intermediary, you will always be the deemed employer. You will be responsible for:
- deducting Income Tax
- deducting employee National Insurance contributions
- paying employer National Insurance contributions
- Apprenticeship Levy
Find out more about your responsibilities as the deemed employer.
Where you contract with one or more agencies for the worker’s services, who the deemed employer is will depend if the other parties in the chain meet the qualifying criteria.
You’ll also need to:
- keep detailed records of all the employment status determinations you make, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements from workers that arise from your determination
- confirm the size of your organisation if asked by the person or organisation you contract with, or the worker
- keep a record of the contractors you engage, including the names and addresses of both the contractor and their intermediary
If the working practices of the engagement change or you negotiate a new contract with the worker, you need to make sure that you re-check the rules to see if they still apply.
An engagement is the specific contract or piece of work that a worker is undertaking. If the off-payroll working rules apply to an engagement it is determined by the:
- terms and conditions
- working practices
You can use the check employment status for tax tool to help you decide if the off-payroll working rules apply.
Taking reasonable care when making a determination
You must take reasonable care when you make a determination about the employment status of a worker. You must tell the worker and the agency, or the person or organisation you contract with, your determination and issue a Status Determination Statement. You should do this if your determination shows that the off-payroll working rules will apply or not.
You must also provide reasons for your determination as, if you do not, the worker’s Income Tax and National Insurance contributions become your responsibility.
What to do if a worker or deemed employer disagrees with your determination
A worker or deemed employer may disagree with the employment status determination you have reached.
If this happens you will need to:
- consider the reasons for disagreeing given to you by the worker or deemed employer
- decide if you want to maintain the determination if you feel it is correct and give reasons why — or provide a new determination because you feel it was wrong
- keep a record of your determinations and the reasons for them, as well as records of representations made to you
- confirm which date your determination is valid from
A disagreement can be raised with you until the last payment is made for the worker’s services.
You must provide a response within 45 days of receiving notification that the worker or deemed employer disagrees with your employment status determination. During this time, you should continue to apply the rules in line with your original determination.
You must introduce a process to make sure you consider your worker’s views if they disagree with your decision.
After considering a disagreement
You should tell the:
- worker if your determination has not changed
- deemed employer and the worker if your determination has changed
Failure to respond within 45 days will result in the worker’s Income Tax and National Insurance contributions becoming your responsibility.
Rules prior to 6 April 2021
Before 6 April 2021, private or voluntary sector clients were not responsible for considering the off-payroll working rules.
Between 6 April 2017 and 5 April 2021, public authorities were responsible for considering the off-payroll working rules but the rules were slightly different to the rules that apply now.