Off-Payroll Working (IR35)
C
hanges to Off-Payroll Working (commonly referred to as IR35) rules came into effect for the Private Sector from 6th April 2021. The general UK consultancy market is now more closely aligned with the Public Sector, where 'new' Off-Payroll Working arrangements have operated since 2017.
In most cases the revised rules now transfer responsibility to the End Client for deciding whether IR35 applies to a particular engagement (except End Clients meeting the definition of a small business, when responibility remains with the consultancy business providing the service). So for Mid & Large sized business End Clients, they are responsible for considering whether the working arrangements are similar to those of employment (Inside IR35). Tax & NI (both employee and employer contributions) are then deducted in full by the client (or agency) before any amounts are paid to the worker’s personal service company (PSC).
Changes to tax and national insurance rates over recent years does mean that the disparity in 'Take Home' between 'Inside v Outside' is less significant; however, reduced opportunities for tax planning, loss of personal allowances at £100K income, and the requirement to cover travel expenses personally, can compound the situation.
Since April 2021, Medium and large companies have become responsible for determining the tax status of contract engagements; with the fee-paying party, often a recruitment agency, responsible for deduction of Tax and NI on engagements where off-payroll working rules are demmed to apply. End Clients and Recruitment businesses also carry some of the financial responsibility for non-compliance. These days, advertised roles with mid or large businesses are usually already assessed by the client for IR35 status i.e. there is more certainty in advance as to whether an assignment has been deemed 'inside' or ‘outside' the scope of IR35. Where the End Client meets the definition of a 'small' business, the consultant operating via their own 'personal service company' (PSC) remains responsible for the determination and deduction of any payroll taxes.
Understandably, some Agencies and End Clients have been extremely cautious with their implementation of the 'new' rules post-April 2021. Often, blanket 'PAYE-only' policies were applied i.e. insisting on the use of PAYE umbrella companies, and not allowing consultants to trade via their own businesses at all.
In recent years, there are signs that the market has begun to settle down, as it did in the public sector following similar changes in 2017 - after all, the IR35 status appraisal criteria itself has not changed. The shift in responsibility for IR35 decisions, has resulted in more roles rightly being assessed as ‘caught by IR35’ than has historically been the case. Those projects deemed as 'outside' IR35 (off-payroll working) tend to be higher rate, short-term consultancy assignments which should legitimately be assessed as outside the scope.
As a consequence of the 2021 off-payroll changes, legal and insurance firms have entered the market, offering client-side contract appraisal solutions and insurance policies. These products are intended to provide end-clients and recruiters with the confidence (and risk mitigation) to continue engaging with personal service companies (PSCs). That said, rather than rely on insurance and third parties, ensuring that the genuine underlying working arrangements truly reflect written IR35 consultancy agreements remains the best way for recruiters and end clients to legitimately stay confident.
Temporary Umbrella Employment (Where insisted by the End Client and Agency)
Consultancy work, both inside and outside the scope of IR35, can continue to be invoiced via a consultant's persoanl service company. However, where IR35 is deemed to apply, there is sometimes pressure from end clients and recruitment businesses to temporarily become an employee of an umbrella. Most recruiters (and end clients) will have a panel of approved UK umbrella companies. Some umbrella companies will offer the option of 'salary sacrifice' employer pension contribution, which may help mitigate some of the tax implications.