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The Off-payroll Tax Rules


STOP PRESS!! As part of the coronavirus measures these off-payroll rules are being delayed a year until April 2021!

The Problem
The Off-payroll rules, or IR35 as they are more commonly known, tries to address a perceived tax avoidance issue. Governments have passed tax rules that allow companies and receivers of dividends to be taxed at lower rates than employees are taxed under Pay As You Earn (PAYE). If a company uses the services of another company then it also avoids employee protection rights, holiday pay, pension contributions. There is therefore understandable pressure for individuals to set-up a company and make themselves appear to be in business when they are really an employee.

One of the classic examples of this was John Birt, who when he was appointed the Director-General of the BBC was not an employee but had his own company. 

This was clearly wrong but that does not mean that every single limited company, every single personal services company (or PSC), is a disguised employee and HM Revenue and Customs (HMRC) still cannot realise this despite constantly losing most of the tax cases they take to the tax tribunals.

The “solution”
From 6 April 2020 the rules are changing. In many ways nothing is changing: if a contractor was outside the scope of IR35 in the past then they will still be outside the scope of the Off-payroll rules.

However what is changing is the responsibility. In April 2017 the public sector became responsible for deciding whether the bottom contractor was in or outside of IR35. From April 2020 a medium or large private sector company will have to make that decision. HMRC are relying on the large or medium-sized companies being so risk adverse that they will move all their freelancers into paid employment.

Top client
From the top client’s point of view this then becomes a bureaucratic nightmare. Every department across a large organisation needs to know the rules. Under the new rules:

  1. The top client determines if IR35 applies
  2. The top client informs the contractor and intermediary of their decision via a Status Determination Statement [SDS]
  3. The SDS must be issued when the contract is entered into
  4. The contractor can appeal the SDS within 31 days
  5. Failure to comply or to make a reckless determination will mean the top client is responsible for PAYE

From the above you can see why many large companies are planning to stop using contractors. The rules where the Top Client is a Small Company are not changing.

Bottom contractor
Many freelancers are being pushed into employment or using an umbrella company. This means that while nothing has changed and the contractor may be convinced that are clearly outside the off-payroll rules; the top client, using an ill-informed individual to make the SDS, may make the wrong decision. While you have the right of appeal many contractors are saying they will simply walk out. This will be seriously bad news for the British economy.

This page is an introduction to the topic of IR35. Over the next few weeks please check back as more blogs linked to this one will be appearing. But in the meantime if you need some professional advice then please contact us.

A quick health warning
This blog and the links from it, are as Aysgarth Chartered Accountants understands the off-payroll rules on the date this is published. Subsequent legislative changes may, and will probably, be introduced. This blog is just an introduction to a complicated and changing piece of legislation and you should take your own legal and tax advice.


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