New off-payroll working rules come into force: what you need to know

Medium and large employers are now required to determine the employment status of contractors after major changes to the off-payroll working rules came into force this month.

Here’s what you need to know.

What are the off-payroll working rules?

A contractor who works like an employee, but is paid through a limited company, should broadly pay the same Income Tax and National Insurance Contributions (NICs) as other employees.

The legislation that governs this practice is known as IR35, or more commonly, the off-payroll working rules.

What’s changed?

From 06 April 2021, the employer will become responsible for determining whether IR35 rules apply, as will the liability for any underpaid tax and penalties.

Until now, it has been the responsibility of the contractor to determine their employment status.

Who will be affected by the new legislation?

Only medium and large-sized businesses and public sector authorities are required to determine the employment status of contractors.

The legislation does not apply to employers who do not meet at least two of the following: a turnover of £10.2 million or more; a balance sheet total of £5.1 million or more; and 50 employees or more.

It is estimated that around 60,000 businesses, 20,000 agencies and 500,000 contractors will be impacted by the legislation.

What are the penalties for non-compliance?

Although HM Revenue & Customs (HMRC) is operating a “light touch” approach to penalties in the first 12 months, businesses may still be fined if there is evidence of “deliberate non-compliance”

The latest guidance states: “You will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months of the operation of the new rules, unless there’s evidence of deliberate non-compliance.”

It adds: “If you realise you have made a mistake in applying the off-payroll working rules, you should tell us about it at the earliest opportunity. We can work with you to put it right, whether that means paying unpaid tax or refunding overpaid tax.

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