Off-Payroll Working Rules

Off-Payroll Working Rules

"Alert! New HMRC Rule. You can now pay the same income tax & NIC for all employees regardless of the employment status."

In this article, we will briefly discuss the basic rules of off-payroll working. Off-payroll working is the word used by HMRC (HM Revenue & Customs) to illustrate the condition where an individual provides their private services by way of their own private company.

Introduction to new rule regarding off-payroll working:

In April 2020 a new rule is being introduced regarding off-payroll working where individuals who work as employees (independent contractors, accountants, bookkeepers etc.) pay the same income tax and National Insurance contribution as employees regardless of their employment status. This rule was based on the government’s budget in 2018, which applies mainly to medium & large-sized firms but not self-employed. Private sectors are unaffected though; the government have recently mentioned how they plan to extend rules for them.

What is off-payroll working tax rules (IR35)?

Without the off-payroll working tax rules (IR35) workers will pay less tax and national insurance (NIC). When an individual or department works for another organisation, a contract is formed. This is used to classify each staff as either self-employed, employed or an independent contractor for them to be taxed accordingly.

From April 2017 rules were introduced to shift the responsibility of deciding whether IR35 applies to a contract. Therefore, tax payment from the person with significant control and the planned changes are going to affect thousands of contractors. Once the IR35 is applied, the Public sector body has to pay the Public Service Company through the payroll as if it were their actual employee, so deducting the PAYE and employee’s NICs.

The rules were initially established in 2000 with the purpose of individuals being treated fairly irrespective of their employment status. However, non-compliance was common. HMRC estimate that only 10% of those not complying with the rules must apply as it will cost Exchequer (government’s current account) £1.3 billion in 2023/2024. HMRC has estimated that 170,000 contractors will be affected in the UK and claims that 90 per cent of them will have their income reduced.

The government consulted on two options intended to ensure that all parties in the supply chain have the information to comply with these rules. The first was to move information down the labour supply chain, while the second would provide determinations directly to the fee payer.

Who is likely to be affected by the changes?

  1. Individuals supplying their services through an intermediary like Personal Service Company (PSC)
  2. Medium & Large sized companies in the private sectors who cooperate with people through PSC. PSC will also be affected by the reform.
  3. Recruitment Agencies

The purpose of this idea was for the government to address on three major proposed issues:

  • To change the scope of smaller businesses.
  • How to ensure parties in the labour supply chain have the information they need to comply with the reform.
  • How HMRC should address non-compliance in the labour supply chain.
Payroll Working Rules

The diagram above demonstrates how the labour supply chain operated initially and the proposed changes. The government believes that clients should pass the PAYE, NICs and income tax down the supply chain to the worker directly will have more clarity on both the fee payer and the worker over their tax position. Fee payers are either people/departments who are responsible for hiring & paying contractors. HMRC will cooperate with stakeholders on finding the best solution for clients using labour supply chains though it means that agencies are going to have to invest more on hiring.

Business Excluded from off-payroll IR35 reform:

Small businesses in private & third party sectors are excluded from off-payroll IR35 reform. But to qualify as a small business, they need to meet the following conditions:

  • Annual Turnover not more than £10.2 million
  • Balance Sheet total not more than £5.1 million
  • Not more than 50 employees in the organisation

Addressing Non – Compliance

The aim was to reduce non - compliance in labour supply chains. The proposed approach would first place the PAYE and NICs liabilities with the party in the supply chain who have failed to follow the obligations, before moving the liabilities to the first agency in the supply chain if the first party still does not fulfil.

Government Policies:

The government does not agree that there are significant incentives for deeming individuals to be employees. It considers the client to be best able to understand the contractual terms and working practices of those it engages. Clients are also best placed to provide responses in real time.

For this reason, independent contractors will need to go into full time employment as they will be paying the same income tax & NIC as a regular employee. In employment they will receive benefits like Statutory Pay, Sick leaves, Holidays and be treated equally like other employees. Future Connect Training provides training on payroll where employers will be able to record employee’s details and produce payslips. This will help attract high profile companies into employing you. We offer Sage payroll training where students can gain skills and an understanding of Sage Payroll to entice major companies into recruiting them. This program has specific features which benefit business owners or accounting professionals as it will be ideal when paying employees.

How we can help you?

We offer work experience to help get ready to work confidently. The software training we offer is approved by the HMRC when recording employee’s details, salaries, calculating deductions from their pay like tax & National Insurance, benefits, payroll taxes paid by the employer, producing payslips for each employee and reporting their pay to HMRC in a Full Payment Submission (FPS). In this software, we focus on the functions, standard in modern-day organizations to ensure that you will be prepared and gain enough experience to specialize in them.

Checkout our Industry-specific training programs here. We have centres based in London and Birmingham. Contact us at 02037908674 or 01212959988 to book a free consultation session. You can also email us any questions at or visit our website for any other information.