Changes to the Off-Payroll Working (“OPW”) rules with effect from 6 April 2021

After a one-year delay due to the impact of the Covid-19 pandemic, changes to the OPW rules (sometimes referred to as “IR35 rules”) for the private sector are finally coming into force with effect from 6 April 2021. This will bring the private sector substantially into line with rules which have been applied to the public sector since 6 April 2017.

Broadly, the OPW rules apply to situations where individual contractors or consultants (referred to as “workers” below) provide their personal services to client organisations (usually companies) through an intermediary (usually their own ‘personal service companies’ or “PSCs”). The supply chain can also sometimes involve agencies. Under current rules for the private sector, if a hypothetical contract between the individual worker and the client would be a deemed employment relationship for tax purposes,  the PSC is required to account for PAYE and NICs on the payments that it receives under its contract with the client. It is currently the PSC’s responsibility to determine the deemed employment status of the individual worker and pay over any PAYE/NICs to HMRC. The client currently has no obligations with respect to PAYE/NICs in respect of payments to workers via their PSC or intermediate agents.

For payments made on or after 6 April 2021, the responsibility for determining the deemed employment status becomes that of the client, and the responsibility for accounting for PAYE and NICs (and, if applicable, apprenticeship levy) on payments to the PSC will become that of the party which makes the payment to the PSC (the ‘fee payer’). Where there are no other parties in the contractual chain between the client and the PSC, the client will be the fee payer and will thus have responsibility for deducting PAYE and NICs and accounting for same to HMRC.

Therefore, with effect from 6 April 2021, clients’ responsibilities will be significantly increased, and will include the following:

Carrying out a status determination

The client must carry out a status determination in respect of any worker who provides their services to the client through an intermediary. The client is required to take ‘reasonable care’ when carrying out such a determination. The determination of employment status is not straightforward and is based on a number of different factors including control, personal service, financial risk and mutuality of obligation.

HMRC has developed a tool (the ‘Check Employment Status for Tax’ or ‘CEST’ tool) to help organisations to determine employment status. It should be noted that there are some instances where CEST will not come to a formal determination, and indeed the Courts have, on occasion, disagreed with a CEST result (although HMRC significantly enhanced the tool in November 2019, to provide a greater degree of accuracy). Given that HMRC has stated that, provided the questions in CEST are answered accurately and in accordance with HMRC guidance, they will stand over the CEST result, it is at least a good place to start when looking at employment status.

Delivering a Status Determination Statement (“SDS”)

The client must deliver an SDS to the worker and also to any third party that the client contracts with. This SDS must set out the reasons for the status determination. There is no set format for such a statement although HMRC has stated that if the CEST output is delivered, they will regard this as constituting a valid SDS, provided the CEST questions have been answered accurately and in accordance with HMRC guidance. The SDS must be delivered by the client before any payment is made.

Establishing a disagreement process

This is to allow workers to challenge the status determination, if they so wish. Where a worker makes such a challenge, the client is required to respond to the worker within 45 days either with reasons why it does not agree with the challenge or to provide a new SDS on the basis of the worker’s representations and state that the previous SDS is withdrawn.

Accounting for PAYE and NICs

Where the client is also the fee-payer, it must deduct and account for PAYE and NICs (and, where appropriate, apprenticeship levy) to HMRC in respect of payments made to the PSC.

There is an exemption from the new OPW rules for ‘small’ client businesses, such that the responsibility for determining status and accounting for PAYE and NICs remains with the PSC. In order to be small, a business will need to satisfy two or more of the following requirements:

  • 1) It has an annual turnover not exceeding £10.2m
  • 2) It has a balance sheet total not more than £5.1m
  • 3) It had an average of no more than 50 employees for the company’s financial year.

There are specific rules for businesses becoming or ceasing to be small, and also for unincorporated businesses. Specific advice should be taken regarding whether, and when, the ‘small’ business exemption will apply.

It should be noted that the changes to the OPW rules do not change the criteria for determining employment status for tax purposes, and it should also be emphasised that deemed employment status under the OPW rules applies for tax purposes only. Legal advice should always be taken in order to determine an individual’s position – and an organisation’s responsibilities – for the purposes of employment law.

If you have any queries about how the forthcoming changes to the OPW rules will affect your organisation, please contact Eamonn Donaghy, Mark Hood or June Barton to discuss further.