If you are a contractor working for the Public Sector or a Large Business you will be assessed against the Off Payroll rules that took effect in 6th April 2021 its a shift in the way the existing IR35 rules are applied.
Who is likely to be affected and what is it
- Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
- Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
- Recruitment agencies and other intermediaries supplying staff through PSCs.
Engagements with small organisations outside the public sector are exempt, minimising administrative burdens for the vast majority of businesses.
A 5% allowance is currently available to those who apply the off-payroll working rules to reflect the costs of administering them. Because responsibility is shifting from the PSC to the engager, this allowance will be removed for those engagements with medium and large-sized organisations. It will continue to be available for engagements with small organisations.
The deemed employer is the person who is responsible for:
- deducting Income Tax and employee National Insurance contributions and paying these to HMRC
- paying employer National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC
How is the money taxed when the contractor’s company gets it?
ESM10030 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how the worker accounts for and reports monies drawn from their intermediary
Remuneration
Remuneration (i.e. such as a salary) drawn by the worker from their PSC will be free of PAYE tax and NICs up to the level of the deemed direct payment, where that remuneration can reasonably be taken to be for services of that worker to a public authority or medium or large-sized organisation not in the public sector. This prevents payments being subject to double taxation (see ESM10024).
This how its processed in Moneysoft IR35 – deemed payments – how to include in RTI to HMRC | Moneysoft
Dividends
If the worker is remunerated via a dividend from their PSC, this will also be tax free up to the level of the deemed direct payment, where the dividend can reasonably be taken to be for the services of the worker to a public authority or medium or large-sized organisation not in the public sector. This only applies to dividends paid to the worker who performed the services subject to the off-payroll working rules. This dividend does not need to be returned on the worker’s self-assessment return.
ESM10035 – off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: CT accounting
Example – Corporation Tax
A worker offering their services through a PSC performs services for Major Retail Ltd, a large-sized business. The engagement is within scope of the off-payroll working rules and Major Retail Ltd deems the engagement would be one of employment if it were direct and deducts tax and NICs. For the twelve-month engagement the worker is paid £1,000 per month plus VAT of £200. Each month £400 is taken in tax and employee National Insurance with £600 plus the VAT of £200 paid to the worker’s PSC. The worker takes all £600 as a payroll payment (like a salary) each month without deducting anything further and submits this through payroll on a Full Payment Submission. The PSC has no other income during the year.
Turnover (12 x £1,000) = £12,000 (credit income)
Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)
Less Payroll expense (12 x £600) = £7,200 (debit in profit and loss)
Profit = £0
If the worker instead of receiving payroll payments, takes the net amount as dividends there would be taxable profit at the end of the year:
Turnover (12 x £1,000) = £12,000 (credit income)
Less Tax and NICs expense (12 x £400) = £4,800 (debit in profit and loss)
Profit = £7,200
The PSC also gets relief, this time for corporation tax, to avoid double taxation. This relief is given by s141A Corporation Tax Act 2009. This relief is used when calculating the company’s taxable profit. A deduction equal to net amount received by the PSC, here £7,200, would be made to leave taxable profit of £0. The £7,200 can then be taken as tax free dividends.
If after filing accounts the circumstances change and the engagement should not have been one to which Chapter 10, Part 2 ITEPA 2003 applied, and tax and NICs are refunded, the necessary corrections to the accounts and tax computations must be made to reflect the new position, as the relief would no longer be due.
