The past twelve months have seen the introduction of various changes to the laws governing how companies pay and account for off-payroll workers. The changes come in the wake of the government being keen to tackle what it saw as abuse of the tax system by contractors selling their services in ways that avoided tax. It stemmed from well paid consultants working for the government using personal service companies (PSC) to access better tax and National Insurance rates. The main issues surround an element of the tax code known as IR35.

How the new working rules apply

In short, these new working rules apply if a worker (sometimes known as a contractor) provides their services through their own limited company or another type of intermediary to the client.

An intermediary will usually be the worker’s own personal service company, but could also be any of the following:

  • a partnership
  • a personal service company (PSC)
  • an individual

The key changes are as follows:

From 6 April 2021, the private sector client (not the PSC) is responsible for determining whether the freelancer is a “disguised employee” – someone doing equivalent work as a payrolled staff member. If they are, then they should be treated as if an employee.

If the client determines that IR35 does not apply, then the client can pay the PSC gross amount. However, if the client determines that IR35 does in fact apply, then client must operate PAYE and pay the net amount to the PSC (in effect taking charge of the tax liabilities in the same way as it would for its payrolled staff.

If the entity in the labour supply chain which pays the fees to the PSC is not also the client of the PSC, then the fee payer is instead responsible for operating PAYE.

However, it’s worth pointing out that these April 2021 rules do not apply to all private sector clients. From now on, clients which are “small” entities do not have to be involved in determining freelancers’ status. In cases like this – whether or not the client is also the fee payer – neither the client nor fee payer need to operate PAYE.

So what does this mean in practice? Essentially, when a client in the private sector is “small”, the responsibility for determining the freelancer’s status remains with the PSC (just as it was before 6 April 2021), and so – if appropriate – then the PSC has to then apply PAYE in relation to the payments it receives from the client.

But what is small? In this case, “small” means a client answers yes to either of these questions:

  • Its annual turnover is less than £10.2 million;
  • Its balance sheet total is less than £5.1 million;
  • The number of its employees is less than an average of 50 in the year.

If the client is non-corporate and it is “small” according to these criteria, the rules similarly do not apply to it.

So the key takeaway is that the “small” exception relates to the size of the client (which may be you as a company), not to the PSC or other agency in the labour chain.

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