New thresholds for off-payroll working

The off-payroll working rules apply where a worker provides their services to a medium or large private sector company or to a public sector body through an intermediary, such as a personal service company. To comply with these regulations, it’s essential to understand the current thresholds and how they might affect your business or contract arrangements. Whether you’re an agency worker, a contractor operating through your own limited company, or an employer engaging such workers, the rules have significant implications for tax, National Insurance contributions, and compliance obligations.

Often referred to as “IR35” in professional circles, the off-payroll working rules were substantially reformed and extended in April 2021. The rules determine whether the fee paid to an intermediary should be treated as employment income for tax purposes, regardless of the actual contract terms. If the rules apply, the responsible party must operate PAYE and deduct National Insurance contributions accordingly.

Who the rules apply to

The off-payroll rules primarily target medium and large employers in the private sector (typically those with a turnover exceeding £10.9 million or balance sheet totals exceeding £5.5 million) and all public sector bodies. If you fall into either category and engage workers through intermediaries, the responsibility for determining whether IR35 applies now rests with you, the engager, rather than with the worker or their intermediary.

The rules do not apply to small private sector companies that fall below the specified thresholds. However, if you’re operating as a contractor through a personal service company and your client is a small business, the rules would not technically apply—though this doesn’t mean you can ignore employment law entirely.

Working out the engagement

To assess whether off-payroll working rules apply to a specific engagement, you must consider whether the worker would be treated as an employee if the intermediary wasn’t involved. Key factors include:

• Control: Does the engager control how, when, and where the work is performed?
• Substitution: Can the worker send a substitute to perform the work?
• Mutuality of obligation: Is there an ongoing obligation for work and payment?
• Integration: Is the worker integrated into the organisation’s structure?
• Personal service: Is the work genuinely carried out by the named individual?

HMRC’s online tool, Check Employment Status for Tax (CEST), can help you reach a determination, though it’s important to note that the tool is indicative rather than definitive. If the engagement genuinely constitutes self-employment—for instance, a specialist consultant undertaking distinct project work with full autonomy—the rules may not apply. However, many intermediary arrangements do fall within scope, particularly where the worker is effectively performing the role of an employee.

Practical compliance steps

Once you’ve determined that the rules apply, you must ensure proper PAYE compliance. The fee paid to the intermediary should be treated as employment income, with PAYE tax and National Insurance deducted accordingly. You’ll need to:

• Submit a Real Time Information (RTI) return to HMRC
• Operate PAYE through payroll software or a payroll bureau
• Provide the worker with a payslip
• Maintain records substantiating your assessment

From the worker’s perspective, if you’re operating through a personal service company and your client is a large private sector employer or a public sector body, you should expect PAYE to be operated on your fees. You won’t be able to claim the expenses against your limited company in the usual way—instead, the company receives a net payment after PAYE has been deducted.

Documentation matters

Good documentation is essential. Keep records of how you assessed the engagement, what factors you considered, and any CEST outputs you obtained. Should HMRC enquire into your compliance, you’ll need to demonstrate that you applied a reasonable process. This is particularly important given that disputes over employment status can result in substantial back-payment liabilities, penalties, and interest.

Conclusion

The off-payroll working rules represent a significant shift in how worker taxation is managed. If you’re an engager, understanding your obligations is crucial to avoid compliance failures. If you’re a contractor, recognising when the rules apply to your arrangements helps you plan your tax position appropriately.

The rules are complex, and different engagements may have different outcomes. Rather than making assumptions, it’s sensible to seek proper professional guidance tailored to your circumstances.

For tailored advice, contact Severn Accounting — we’re here to help.