IR35, intermediaries’ legislation, off-payroll rules, agency rules. So much jargon! And so many ways in which a contractor/consultant can engage with your business.
With the change to the way in which contractors who work with you will be taxed almost upon us (and the corresponding obligation on business regarding payroll) it is worth taking 10 minutes to wrap your head around which regime applies and what your obligations may be when you are looking for talent to support your business.
IR35 and Off-payroll Rules
The contractor is providing their services to you through their own company or partnership.
IR35 and the off-payroll rules form part of the intermediaries’ legislation. It applies where a contractor engages with your organisation through an intermediary. The intermediary must be owned or controlled by the contractor and is typically a limited company (personal services company) or a partnership. When making the determination as to whether the intermediaries’ legislation applies, the question is always: “would the person who is supplying the services be considered to be an employee of the business were it not for the fact they are doing so through the intermediary?” Until April 2021, the intermediary is obliged to ask and answer the question and, where required to do so, deduct and pay over the necessary income tax and NICs to HMRC (This is IR35 in its usual form). With effect from 6 April 2021 the off-payroll rules shifts that obligation to ask the question to your business and, if the answer to the question is “yes” then your business must deduct income tax and NICs from the VAT exclusive amount of the fees and account to HMRC for the amount so deducted as well as employer’s NICs (and possibly apprenticeship levy).
There are some exemptions to who will be affected by the change, the most important of which is the small company exemption. If you are a small company you will have an annual turnover of less than £10.2m, a balance sheet total of less than £5.1m and/or fewer than 50 employees (you need two of these). If you fall into this category then the intermediary through which your contractor provides their services retains the obligation to ask the question. This is indeed good news for small businesses saving them the burden of compliance. Be mindful though, if you are fortunate to be able to claim this exemption, that you assess annually whether the exemption still applies. If the exemption no longer applies because your business has exceeded the metrics of the test, then in the off-payroll rules are applicable from the start of the tax year which follows the year in which your businesses ceased qualifying for the exemption.
Agency Rules
The contractor is supplied to you through an agency and there is no personal services company or partnership involved
For the purposes of tax, where an agency supplies a contractor to your business and that contractor is subject to supervision, direction and control by any person, then the contractor is taxed as the employee of the agency. The agency has the obligation to assess whether any party is able to supervise, control or give direction to the contractor. For example, you contract with an agency for the supply of an IT consultant for 3 months to support your help desk. That person works under the day-to-day control of the head of IT in your business and timesheets are supplied to the agency. In these circumstances, the agency must deduct income tax and NICs and the agency will have to account for employer NICs.
What if the agency supplies a contractor who has their own personal services company? Off-payroll rules will apply because the contractor is working through an intermediary. So, unless you can claim the small company exemption, you will need to make an assessment regarding the tax status of the individual and operate payroll if required.
How to work out what action you need to take?
The key question is: “does the contractor provide their services through their own company or partnership?” If they do, you know you are dealing with the off-payroll rules. Your next step is to consider whether there is an exemption available to you. Failing an exemption, you will need to comply with the off-payroll rules. Knowing an understanding the various regimes in play when hiring contractors will enable you to make your business ready to secure contracting talent quickly and when you need it most.