Tim Palmer reviews the IR35 regime when a medium or large-sized engager uses the services of a personal service company.
On 6th April 2021, the ‘IR35’ private sector rules came into force. The impact is as follows.
A medium or large-sized business engager in the private sector now has the responsibility of deciding whether IR35 applies to their engagement with a personal service company or partnership.
Example 1: Worker, intermediary and fee payer
Bovit (turnover greater than £10.2m): the end client and the fee payer
Fred Ltd (renders fees to Bovit of £100k): the intermediary
Fred: the worker
As the legislation only applies to medium and large business engagers in the private sector, those engager businesses that are small do not have to apply the rules.
Accordingly, a personal service company (PSC) engaged by a small business from 6th April 2021 continues to self-assess its own IR35 status and account for its tax and National Insurance contributions (NICs) deductions.
To be a large or medium-sized engager, it must meet two of the following conditions:
- Turnover – more than £10.2m
- Balance sheet total – more than £5.1m
-
Number of employees – more than 50
The person paying the worker’s intermediary company is known as the ‘fee payer’. It has the responsibility for deducting PAYE and NICs and calculating the payment deemed to be made to the worker (the deemed direct payment, or DDP for short).
If the large engager is an individual or a partnership, then in terms of tests, it is only necessary to apply the turnover test of £10.2m.
Example 2: ‘Large’ individual engager
Alan Jones: individual large engager
Fred Ltd
Fred
The balance sheet and number of employees tests are not relevant to individuals or partnerships who are large engagers. A charity can also be a large engager for IR35 purposes. However, in reviewing the conditions, the charity’s turnover does not include donations and grant income.
Example 3: Is the engagement ‘caught’?
Bovit (a large engager) has to consider: Is the engagement caught by IR35?
Bovit
Fred Ltd
Fred
Would Fred be ‘deemed’ an employee of Bovit if he did not have the protection of his company but was working for them as an individual?
Bovit
Fred
Bovit has to deduct PAYE and NICs from Fred Ltd’s fees of (say) £100,000 and also account for Employer’s NICs.
Bovit puts the £100,000 fees of Fred Ltd through their payroll as if they were employing Fred. It will also cost Bovit NICs of 15.05% x fees.
Bovit deducts the NICs and PAYE of, say, £40,000 (this is a purely hypothetical figure for illustration purposes). Fred Ltd (not Fred) receives the £60,000 net fee.
Fred Ltd will not, in practice, effectively pay corporation tax on the £60,000. It is deemed to be Fred’s personal employment income.
At the end of the fiscal year, Bovit will give Fred a form P60. If the work is only for a short period, the fee payer would issue a form P45 rather than a P60. His accountant will put the appropriate figures on Fred’s own personal self-assessment income tax return. It is Fred’s deemed employment income.
If the engager has a turnover of less than £10.2m and fails the other tests, Fred Ltd will have to self-assess and account for IR35 if it applies to the engagement.
Practical tip
Medium and large-sized engagers must now always review their engagements carefully with PSCs, and deduct PAYE and NICs where the engagement is caught within IR35.
