The off-payroll working rules can apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client. An intermediary will usually be the worker’s own personal service company, but could also be any of the following: a partnership, a personal service company or an individual.
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’. The client is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager, hirer or end client.
IR35 is the name given to tax legislation in the Income Tax (Earnings and Pensions) Act 2003. It was originally introduced in 2000 to deal with alleged tax avoidance via the use of Personal Service Companies (PSC’s). It is intended to ensure that contractors who work like employees pay broadly the same employment taxes as actual employees, regardless of the structure under which they provide their services. Currently, if you work through your PSC you need to declare whether you work inside (taxed as employed) or outside IR35 (taxed as self-employed).
HMRC has indicated that the changes are being introduced to improve fairness in the tax system by ensuring that where individuals are working for a company via an intermediary (through their PSC) they should not able to ‘sidestep employment taxes’ or National Insurance Contributions (NICs) by working through a PSC.
Following the 2017 changes in the Public Sector, the liability for making the IR35 determination shifts from the contractor to the end-user (also known as end-client). The end-client needs to provide the status determination (inside or outside IR35) to both the contractor and BSS.
If the end-client determines the assignment is outside IR35, then BSS will pay your PSC the agreed pay rate without making PAYE deductions as for tax reasons you are classed as ‘self- employed’.
If the end-client determines that you are inside IR35 then you are classed as ‘employed’ for tax purposes. You will then have to work through one of BSS's approved umbrella companies. The umbrella company will need to make a ‘deemed employment payment’ and therefore deduct PAYE from your pay rate. This includes responsibility for levying income tax and accounting for (employer’s) NIC’s. The umbrella company may also charge a fee for using their services. All these deductions will impact your take-home pay.
You may decide to continue working through your PSC as you may also be working on assignments that are outside IR35. However, you need to discuss with your umbrella company if they are willing to pay your PSC rather than payrolling you as an individual. BSS, however, is not in a position to pay you or your PSC if the assignment is classified as inside IR35.
Many end-clients will use the CEST tool that was designed by HMRC. However, there are other tools on the market which help clients to determine whether an assignment is inside or outside IR35. In any case, the end-client needs to exercise reasonable care when making the status determination. This means that the end-client needs to explain why they are of the view that your assignment is inside or outside IR35.