Off-payroll working (IR35) rules for the private sector

After a one-year delay due to the pandemic, the extension of the off-payroll working rules (IR35) to the private sector will take effect on 6 April 2021. This represents a major shift in tax compliance for medium and large businesses that engage contractors through personal service companies (PSCs).

The responsibility for determining whether a contractor falls inside or outside IR35 shifts from the contractor to the end-client. Failure to comply can result in significant tax liabilities and penalties for the engaging business.

Who is affected?

The new rules apply to medium and large private sector organisations. A business is considered 'small' (and therefore exempt from the new rules) if it meets two of the following criteria: an annual turnover of £10.2 million or less, a balance sheet total of £5.1 million or less, or 50 employees or fewer. If the end-client is small, the responsibility for determining IR35 status remains with the contractor's PSC.

Status Determination Statements (SDS)

Medium and large clients must assess the employment status of every contractor they engage and issue a Status Determination Statement (SDS) to the contractor and the agency (if one is used). The SDS must state whether the contractor is deemed to be an employee for tax purposes and provide the reasons for that decision. Clients must take 'reasonable care' when making this determination; blanket assessments of all contractors as 'inside IR35' are not permitted.

The fee payer's responsibility

If the SDS concludes that the contractor is 'inside IR35' (i.e., they would be an employee if engaged directly), the 'fee payer'—the entity that pays the contractor's PSC, which could be the end-client or a recruitment agency—must deduct Income Tax and employee National Insurance contributions from the payment via PAYE. The fee payer must also pay employer National Insurance contributions and the Apprenticeship Levy on top of the contractor's fee.