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Off-Payroll Working Rules Extension (IR35)

The ‘Off-Payroll Working Rules’ (the Rules) that currently apply to the public sector are to be extended to medium-to-large private sector organisations from 6 April 2020, requiring any of those organisations that contract with a personal service company (PSC) for the provision of workers’ services to account for tax and national insurance through PAYE. At present it is the worker’s responsibility to account for tax and national insurance and existing contracts will have been negotiated on that basis. The shift in liability is a major change, the implications of which remain to be seen.

The extension of the Rules is controversial, with many concerned that private sector organisations will simply stop using contractors. Business groups have urged the new Chancellor of the Exchequer, Rishi Sunak, to delay the extension of the Rules to allow for greater consideration of their implications amid allegations that the changes are being rushed through. At the time of writing the government’s consultation on the legislation remains open so further amendments may yet be made but at present the 6 April 2020 deadline remains. The House of Lords Finance Bill Sub-Committee’s inquiry into the Finance Bill 2019-20 is to focus on the extension of the Rules and has invited written evidence from affected parties, to be provided by 25 February 2020.

The changes impact the whole supply chain and as a result whether you are a contractor or a client it is important to review your contractual arrangements now to ensure you are ready.


Only organisations classed as ‘small’ are exempt from the extension. A company will always be small in its first financial year. In order to qualify as small in any other tax year, two or more of the following must be true:
a) Annual turnover must be less than 10.2 million
b) Balance sheet total must be no more than 5.1 million
c) The organisation must have no more than 50 employees

A group company may only be classed as small if its parent is also small.

Any organisation which falls outside of the above will be classed as medium-to-large and will need to review its service contracts to assess whether the new rules apply.

Personal Service Company (PSC)

A contract could be caught if the service is provided to the client organisation (the Client) by:
a) A company in which the worker has a material interest (more than 5% shares and votes)
b) A partnership of which the worker is a member and the worker (alone or with family) is entitled to 60% of the profits or payment under the contract is linked to services provided to a single client
c) An individual

The worker must notify the Client if the above conditions are met. If so then the Client needs to review the contract to determine whether the worker is to be ‘deemed employed’, requiring the Client to account for tax and national insurance.

Deemed Employment Status

A worker is to be deemed employed if the services provided by a PSC are similar to those of an employee or if under the contract the worker is an office holder of the Client (other than a statutory auditor).

Clients are required to take reasonable care when determining employment status. HMRC provide an online checker, Check Employment Status for Tax (CEST) which can be used to determine the status of a worker. There is no obligation to use the online checker but if it is used correctly, and the result saved, this should provide protection against any suggestion of a failure to take reasonable care when determining the worker’s status.

Once a worker’s status has been determined, the worker and any agency that pays the worker must be informed. A Status Determination Statement (SDS) will need to be completed setting out the worker’s status and the reasons for the determination. Written questions may then be raised to which the Client must respond within 31 days.

A failure to take reasonable care when making a determination and/or a failure to provide information could result in responsibility as deemed employer passing to the Client. All parties in a supply chain are required to be informed, with each link passing the SDS on to the next. Failure to pass on the SDS could result in liability as deemed employer being incurred. Otherwise, it is the organisation who pays the PSC at the bottom of the chain who will be the deemed employer and thus liable to account for tax and national insurance. If there is no supply chain and only a simple contract between a Client and a PSC, it is the Client who will be the deemed employer.

Deadline: 6 April 2020

In relation to ongoing contracts, any determinations must be made before the first payment due after 6 April 2020.

Following an amendment published on 7 February 2020, the extension of the Rules only applies to services provided after 6 April 2020, regardless of when payment is made. If a payment relates to services provided both before and after 6 April 2020 then a ‘just and reasonable apportionment’ (such as by time) will be required.


The extension of the Rules will have implications for both contractors and Clients. Existing contracts may need to be re-negotiated and/or relationships restructured to take account of a change in tax liability. Failure to comply with the Rules, or to consider their impact on existing working relationships, could be costly. It is therefore important to ensure that you are familiar with the Rules and their application before they come into force on 6 April 2020.

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