What do the new off-payroll working rules mean for your business?

Construction firms need to ensure payroll systems can cope with new rules affecting off-payroll workers, explains Malachy McLernon, Tax Director at PKF-FPM chartered accountants and business advisers...

Malachy McLernon, PKF-FPM Tax Director.

Off-payroll working rules are now being rolled out in the private sector, affecting most construction businesses. 

The purpose of the new rules, commonly known as IR35, is to ensure that individuals working like employees but through an intermediary company, pay broadly the same income tax and National Insurance contributions (NICs) as individuals who are directly employed. 

What payments are affected?
The new rules affect payments made by end-users for services provided by off-payroll workers – where the end-user is a large or medium-sized company. They apply to payments on or after 6 April 2021.

If the end-user is a small business, the rules do not apply. A small business is defined as having two of the following characteristics:

• Annual turnover of less than £10.2m
• A balance sheet of less than £5.1m
• Fewer than 50 employees

Impact on payments
Payments made by a company to an intermediary for services provided by an individual must be treated as employment income if the services can be considered to be akin to those provided by an employee. 

Under the new rules, the end-user, rather than the service provider, must decide whether the off-payroll rules apply by determining the employment status of each individual on a project (self-employed, employed or worker). This can be complex for businesses in the construction sector where many tiers of sub-contractors are often required to complete a project. If the end-user determines that an individual is a worker, they will need to ensure that the worker is paid via PAYE by the fee-payer in the chain, which may be the agency that provided that worker. 

Disputed status
There are a lot of specialist self-employed workers in the construction industry who may not agree with an end-user’s assessment of their employment status. Remember this assessment is made for each project a person works on, not for the entire working relationship between a contractor and sub-contractor. 

The end-user, as well as having an obligation to share their assessment of employment status with the supplier, also has a duty to deal with appeals within 45 days of an objection being raised. 

Construction businesses will need to implement systems to document the employment status determination process and result and have someone available to respond promptly to any appeals made. Systems will need to include details of the appeals process and determinations.

Paying supplier companies
A further complexity relates to how to pay an intermediary supplying the services of an individual. Many construction businesses have a separate system for supplier payments, principally designed around payment terms, VAT and CIS checking, and so on. This system will now need to work with their payroll system. 

Under the off-payroll working rules, if the construction business decides that a CIS contractor is in ‘deemed employment’ the off-payroll rules will take precedence over CIS. This means that CIS deductions do not apply and income tax and national insurance deductions are made from the contractor’s payments instead. 

What’s more, the payment made to the individual within the supplier company is a reverse calculation as the payment is after tax, NIC and any business deductions. This payment may have to be made without the knowledge of that individual’s PAYE coding and national insurance number, if the supplier objects to providing those details. 

Payment dates will need to be considered as contractual invoicing terms are unlikely to be the same as payroll run dates, unless some thought is put into this beforehand. 

All in all, there are plenty of challenges facing businesses operating with the construction sector and hirers will need to be able to demonstrate that they have taken reasonable care in making assessments of each contractor assignment.

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