From 6 April 2021, all medium and large private sector clients will be required to determine whether they need to deduct tax and NI when paying contractors.
Contractors and other individuals working through their own limited company may be affected by the changes to off-payroll working rules (IR35).
The changes for contractors
- Medium or large-sized non-public sector organisations will now decide the contractor’s employment status for tax purposes from April 2021;
- Public sector organisations of any size will already determine the contractor’s employment status and there are no further changes from April 2021; and
- Contractors will remain responsible for considering their employment status for small non-public sector organisations from April 2021.
How the changes will impact contractors
The changes to off-payroll working rules will affect how much income tax and National Insurance Contributions contractors pay.
It is the responsibility of the contractor’s client to establish their employment status for tax and provide a ‘Status Determination Statement’ to explain their decision.
Contractors might be required to provide additional data to help inform the determination.
If contractors do not agree with their client’s determination, concerns can be raised through the client’s status disagreement process. The client has forty-five days, from the date they receive the disagreement, to respond.
Contractors inside the off-payroll working rules
If a client determines that a contractor is inside the off-payroll working rules and that they are employed for tax purposes, they will deduct the necessary tax and National Insurance before the contractor is paid.
Contractors will still be required to submit a tax return and the income and tax already paid, as a result of the off-payroll working contract, will be shown in the employment pages of their Self Assessment return.
Contractors will get relief on the tax already paid.
If the off-payroll working rules apply, this does not mean that the contractor is entitled to statutory payments or employment rights from the client they provide services to. However, salary paid from their own limited company may entitle them to statutory payments.
Contractors outside the off-payroll working rules
If a contractor is outside the off-payroll working rules and they are self-employed for tax purposes, their limited company or other intermediary will continue to receive gross payments and will remain responsible for meeting its tax obligations for that income.
Off-payroll working rules flowchart for contractors
HMRC have a helpful flowchart for contractors to illustrate how they might be affected by the updated off-payroll working rules.
Contractors should consider whether the rules are likely to apply to them and how this will affect their overall tax liability. It may be necessary to review the terms of their contracts and, if caught by the off-payroll working rules, determine how this affects their business strategy and fee structure for the future.
This is a complex area of tax law and the effects can be significant for both engagers and contractors. Download our factsheet below for further information on this topic or for additional advice on the changes to off-payroll working, please get in touch with your usual M+A Partners contact or email firstname.lastname@example.org