IR35 – Off-payroll Working in the Private Sector – April 2021
Frequently Asked Questions
What is IR35?
IR35 is essentially a series of tests that determine the tax status of workers working through limited companies (PSCs). These tests are designed to root out false self-employment and confirm:
- whether there is financial risk to the worker – whether the worker is liable for any mistakes made
- the existence of a right of substitution – whether a worker can nominate a substitute if they cannot work due to e.g. illness
- the presence or otherwise of mutuality of obligation – whether the client has to provide work and the worker has to accept it
- whether the role is subject to supervision, direction and control – whether a clear line-management structure exists
The rules are designed to ensure that workers pay the correct amounts of Tax and National Insurance Contributions NICs.
Pre 6th April 2021 – For workers providing their services via limited companies to Private Sector clients it is currently the responsibility of the worker to determine their IR35 status and to account for tax and NICs to HMRC on this basis.
What are the new rules?
The new rules for the Private Sector are broadly similar to those introduced for the Public Sector in April 2017, meaning that as of 6th April 2021 it will be the ‘end user client’ not the worker, who decides the IR35 status of a given assignment.
This means that if the end user client decides that a worker’s role is caught by IR35; their income will be taxed at source, regardless of whether they choose to operate via their PSC, or opt for an alternative payment method.
When do the new rules come into force?
The new rules come into force on 6th April 2021.
Who do the new rules affect?
The new rules apply to anyone providing their services via a limited company/personal service company (PSC).
Does this apply to all Private Sector Clients?
No, there is an exemption for smaller companies. If the end user client meets two or more of the following criteria, it qualifies as a ‘small company’ and the new rules will not apply, i.e. it will continue to be the worker, not the end user client, who determines the IR35 status of the assignment:
- a turnover of less than £10.2 million
- a balance sheet value of no more than £5.1 million
- no more than 50 employees
Can workers still use their limited companies if caught by IR35?
Yes, they can continue to use their limited companies, although as outlined above, if their role is deemed to be inside IR35, all of their income will be treated as employment income and tax and NICs will be payable at the applicable rates. In these circumstances there will be little or no tax benefit to working through a limited company, plus it will cost money to keep it open. Therefore we would recommend that workers talk to their accountants regarding whether they should consider closing it. If the role is determined to be outside of IR35, then they can continue to receive gross payments through their limited company.
What are my payment options after 5th April?
If workers choose to cease operating through their limited company after 5th April then options will be to be paid PAYE by ID Medical, or to work via an umbrella company.
What’s the difference between working via an Umbrella and PAYE?
An umbrella company is a company that employs a number of temporary agency workers and manages all of their payroll related matters. The benefit of an umbrella company is that workers are able to work for a number of different hirers and via a number of different agencies over a period of time, while all of their pay and tax affairs are managed in one place. This provides a great deal of flexibility for the worker. They are still placed in each assignment by their agency; the umbrella just looks after their payments and general tax matters. Umbrellas generally charge a fee of between £12 and £25 per week for this service. ID Medical has identified and engaged a preferred supplier list of umbrella companies with fees around £10~£15 – details can be provided on request.
Alternatively workers could work directly for ID Medical and be paid PAYE. As an ID worker, workers enjoy the benefit of daily payroll runs, ensuring that they receive their money within a couple of days of submitting timesheets.
There is very little difference in take-home pay whether a worker works via an umbrella or PAYE. We would suggest that workers always ask an umbrella to provide them with a worked illustration of what their take home pay would look like if they worked with them, compared with PAYE through ID Medical.
Can workers use an umbrella not on ID Medical’s preferred list?
Yes, but we will conduct a detailed audit on their compliance and service levels to ensure standards are being met. Details should be forwarded to Payroll@id-medical.com to start the process.
NOTE: Whilst some umbrellas advertise extremely high levels of take home pay, many of these schemes are highly dubious and place workers at significant risk of investigation for tax avoidance by HMRC. This may result in a demand for unpaid tax, interest and substantial penalties. If it looks too good to be true, it probably is!
Who are our preferred umbrella companies?
Our current preferred umbrella companies are:
- Brookson 1
- RACS (People Group)
For links to each individual umbrella, please visit our website.
What about pension, sick pay and holidays?
With ID Medical’s PAYE model workers will, subject to the necessary qualifying criteria, be entitled to join our auto-enrolment pension scheme and receive sick pay and maternity pay. Contributions for our pension scheme are currently set at 3% employer’s contribution and from 5% employee’s contribution.
Umbrella companies generally offer a similar range of statutory benefits and workers are encouraged to speak to one or more of our preferred umbrellas in order to find out more.
Will workers still need an accountant if they close their limited company?
It may be worthwhile workers using the services of an accountant to assist with annual Self-assessment Tax Returns in order to ensure that everything has been included. In particular any allowable expenses that will serve to reduce the tax for the year and so may lead to a refund of any overpaid tax.
Will workers still be able to offset their professional expenses against tax under the new rules?
There are certain professional expenses that workers can continue to offset against tax. They are advised to speak with their accountant to obtain appropriate specialist advice on this.
NOTE: ID Medical is neither licensed nor qualified to provide individual, specific financial or tax advice.
If a worker is over the state pension age do they still have to pay employee’s NICs?
Once a worker has reached the state pension age there is generally no reason for them to pay Employee NI contributions. Employer contributions would still be payable whether they are working via PAYE, umbrella, or continue to operate a PSC.
If a worker has used the HMRC on-line tool and it says that they are outside of IR35 but the client says they are caught within IR35, what should they do?
The decision as to whether a role is caught by IR35 is now made by the hirer – the end user client for whom a worker is working. If the hirer deems their role to be caught by IR35 but the worker believes the answers they have provided in the HMRC on-line tool are 100% objective and accurate, then they should appeal their IR35 status with the client via the client’s appeals process. It is for the client to review the IR35 status determination.
How does the appeals process work?
If a worker disagrees with the IR35 status determination provided by the client they should appeal directly to the client, or contact ID Medical and we will do so on their behalf (ID workers).
The client must respond to an appeal within 45 days, during which time the worker will continue to be paid according to their original decision. The client’s response must state whether or not their original decision has changed and explain the reasons for this.