If you use workers who provide their services to you through an intermediary, such as a personal service company, you may need to comply with the off-payroll working legislation (in ITEPA 2003, Pt. 2, Ch. 10). This may be the case if you are a medium or large private sector organisation (within the meaning of the Companies Act 2006) or a public authority. If you are a small private sector organisation using workers who provide their services through an intermediary, you do not need to consider the off-payroll working rules. Instead, your worker’s intermediary will need to consider whether the IR35 rules (in ITEPA 2003, Pt. 2, Ch. 8) apply to them.
The intention of this letter is to set out, in as simple terms as possible, what this means for you and describe the procedures that you will need to have in place to ensure that you do not fall foul of the off-payroll working rules. The consequences of not being prepared may leave you liable for any PAYE & NICs that are due and additional penalties. If you need assistance with any aspects of these procedures, we will be happy to help and these services may then be the subject of a separate engagement letter.
Outline
The off-payroll working legislation is anti-avoidance tax legislation which may apply in circumstances where a worker uses an intermediary – such as a Personal Services Company (PSC) or occasionally a partnership – through which they supply their services to a medium or large private sector organisation or a public authority.
The responsibility for determining whether the off-payroll working rules apply and for complying with those rules where it does falls onto the end client where this is a medium or large private sector organisation or a public authority, rather than the personal services company (PSC) or other intermediary providing the worker. If you engage workers who use companies or intermediates in this way, you are the end client. If you are classified as ‘small’ you do not need to consider or apply the off-payroll working rules. The worker’s intermediary must instead consider whether the IR35 rules apply.
To determine whether the off-payroll working rules apply, you as the end client must undertake a status determination, looking through the intermediary to ascertain whether the worker would be an employee if they provided their services to you directly. You can use HMRC’s Check Employment Status for Tax (CEST) tool for this purpose. You should give a copy of the decision to the worker, and keep a copy for your records. You must take reasonable care when making a status determination. If the worker disagrees with the status determination, you must consider their reasons for disagreeing and respond within 45 days.
If the worker would be an employee if they supplied their services to you directly, you must comply with the off-payroll working rules. Under these rules, the liability to operate PAYE & NICs (and Apprenticeship Levy where appropriate) on the ‘deemed direct payment’ falls onto the fee-payer – ie whoever actually pays the worker’s personal service company. If you make payments to the worker’s PSC then you are the fee-payer. Note that Student Loan deductions, auto-enrolment pensions and Statutory Payments (SSP, SMP, SAP, SPP, ShPP and SPBP) do not apply to these workers.
The end client and the fee-payer are often, though not necessarily, the same person. Sometimes the worker’s PSC may use an additional intermediary through which to contract with the client, e.g. an agency. In that case, it would be the agency that is the fee-payer. Nevertheless, it is still the end client that is responsible for making the off-payroll working rules decision and informing the fee-payer of the outcome – failure to notify the fee-payer means liability for any underpaid PAYE and NICs remains with the end client.
Exemption for small private sector organisations
The off-payroll working rules do not apply to private sector end-client organisations which are small. Where this is the case, the worker’s intermediary is responsible for determining whether the separate IR35 rules apply, and complying with those rules if they do.
In this context, a partnership or sole trader will be ‘small’ if annual turnover is not more than £10.2 million. For a company, it will only be ‘small’ if it meets any two of the following requirements in the last financial year to end before the tax year begins:
This definition applies equally to LLPs and companies - whether registered, unregistered or overseas.
For financial years beginning on or after 6 April 2025, the thresholds will increase as follows:
Worker’s responsibilities
If the end client is a small private sector organisation and the worker supplies their services through an intermediary, the worker’s intermediary is responsible for determining whether the worker would be an employee if they supplied their services direct to the client. Where this is the case, the worker’s intermediary must calculate the deemed payment under the IR35 rules and account for tax and National Insurance on that deemed payment.
If under the off-payroll working rules, the worker does not agree with a status determination provided by the end client, they can challenge it. They can raise a disagreement at any time before the last payment is made under the contract. The client must consider their reasons and respond within 45 days.