Support if you are affected by the upcoming off-payroll changes

From 6 April 2021, medium and large-sized private sector organisations will be responsible for determining if individual contractors they engage are employed or self-employed for tax purposes. ‘Contractors’ are individuals who work through their own limited company.

This is a huge change from the current situation, under which individuals themselves are left to make that determination (in accordance with the ‘IR35’ rules). It is expected to affect how much tax hundreds of thousands of those people pay. As a result, some of those affected may decide to shift away from working through their own limited companies.

Basic information about the changes

An overview of the off-payroll changes, which may help you identify if you are affected, can be found on our website.

Sometimes agency workers are told to set up a limited company by their agency or umbrella company. If you work through an agency or umbrella company and aren’t sure if you are also currently working through a limited company, you should double check with the agency or umbrella company. You could also search for your name on the Companies House website.

If you do have a limited company set up, you need to make sure you are clear on what will happen after 6 April 2021, for example, whether you will still be required to work through the limited company or not.

For those individuals who will continue to work through their own limited company after the new changes…

HMRC are offering:  

• Guidance on steps contractors and others in supply chains, can take to prepare for April 2021
• Webinars
• Updated and improved technical guidance 
• Factsheets to help those affected, including contractors, understand and prepare for the changes.  

HMRC have also published a briefing, setting out how they will help and support organisations to comply with the off-payroll working rules, as well as how they will intervene where customers deliberately don’t comply.

This briefing focuses on the compliance of medium and large organisations because under the new rules, contractors will not be liable for tax due on their engagements with these end clients.

Although the briefing is not intended to cover the compliance approach for contractors, you may find it useful to understand how HMRC will ensure compliance with the off-payroll working rules. For example, within the briefing, HMRC reaffirm their commitment that they won’t use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021/22, unless there is reason to suspect fraud or criminal behaviour. 

In terms of helping contractors to get their tax right, HMRC will apply the principles set out in their wider briefing ‘Ensuring the correct tax is paid’.

For those individuals who will cease working through their own personal service company and who will work through an umbrella company instead…

If you are a contractor (or agency worker working through a limited company) and fall under the new rules, post April 2021, the cost savings you (or others in your supply chain) may have been receiving until now may well disappear. This may mean that you may not want to continue running a limited company, especially when you consider the additional administration that comes with a limited company.

Therefore, you may wish to, or be asked to, stop working through your own company. Your options are then:

• to try and get taken on directly by the end client as an employee,
• or to carry on working ‘flexibly’, via agencies for example, but under PAYE. This will usually mean that you will need to work through an umbrella company, as agencies do not usually operate PAYE on workers’ wages themselves.

If you decide to, or are asked to, work through an umbrella company, you should make sure you use a compliant umbrella company.

Please be very wary of the potential problems with some non-compliant umbrella companies we outline on our website. In particular, some highly aggressive umbrella companies set up arrangements where, instead of receiving normal taxable pay, workers receive payment in the form of artificial 'non-taxable' investment payments, grants, loans, credits and so on. You need to be vigilant not to enter into these arrangements, as you could end up paying far more than just the tax back to HMRC, as we explain in our news article Agency workers: being promised the world by an umbrella company? Don't fall for it!.

If you stop working through your own limited company, and do not want to keep it dormant (which will still require you to keep returns and accounts up to date each year), you also need to take steps to ensure that you close your old limited company down properly.

If you don’t do this then Companies House and HMRC will probably continue to expect you to file returns and accounts each year. If you don’t meet these obligations, you will be non-compliant and risk enforcement action/penalties etc.

For those who are not affected by the new rules

Those individuals continuing to provide their services through a limited company, but to ‘small’ clients in the private sector (as well as individuals, for example, homeowners needing an electrician or gardener), will still need to consider whether the old IR35 rules apply to them – these do not just fall away altogether post April 2021. In fact it is foreseeable that the old rules may start being more actively enforced after April 2021 – so you need to make sure you are clear on whether your client is ‘small’ and if so, what the IR35 rules mean for you.