Extension of Off-Payroll Working Rules Postponement

The government announced yesterday that the extension of off-payroll working rules to medium and large companies in the private sector is being postponed until 6 April 2021.

The IR35 legislation was introduced in 2000 with the aim of cracking down on a form of perceived tax avoidance whereby individuals would seek to avoid paying employee income tax and national insurance contributions (“NICs”) by supplying their services through an intermediary (usually a personal service company) and typically paying themselves in dividends.

In summary, the IR35 legislation requires the intermediary to determine whether the worker would have been a deemed employee of the end-user client, but for the existence of the intermediary. If so, the intermediary must operate payroll, make deductions for income tax and employee’s NICs and pay employer’s NICs on the fees received for the services.

However, the treasury’s perception of large-scale tax avoidance nonetheless continued and therefore the government introduced the off-payroll working rules in 2017 for the public sector, whereby the responsibility for operating payroll, making deductions and paying employer’s NICs shifted from the intermediary to the paying party, where payments for the services were being made by, or on behalf of, public authorities.

These rules were to be extended to medium and large business in the private sector for services provided on or after 6 April 2020. However, in light of the burden on the economy of the coronavirus outbreak, this change has been shelved for a year.

The effect of the new rules is that the burden of making a determination of employment status will fall on “end-user clients”, who then need to notify their contracting party and the worker of that status determination. The final party in the chain before the personal service company must operate payroll, make deductions and pay employer's NICs on the fees paid for the services.

In anticipation of the changes taking effect this April, many businesses had announced that they had ceased, or would be ceasing, to engage contractors through PSCs. Many other businesses, however, were struggling with this issue, and the delay in implementation provides them with more time to prepare.