Employment Status and IR35 for a Consultant

Off-payroll working rules (IR35). The off-payroll working rules apply where an individual (Sam) provides services to a client (BigBank) through an intermediary (Delta Ltd) and, but for the intermediary, the individual would be regarded as an employee of the client. The rules shifted responsibility for determining employment status to the client in the public sector (2017) and to medium and large private sector clients (2021). Small private sector clients are exempt; the intermediary remains responsible for applying IR35.

Size of Delta Ltd. Delta Ltd is the intermediary. The client is BigBank. BigBank is a large bank, so it is a large client. However, the SDS states that Delta Ltd is a small company. The small company exemption applies to the client, not the intermediary. The client is BigBank, which is large, so the off-payroll rules apply. The SDS is incorrect if it relies on Delta Ltd's size. The correct test is the size of BigBank. BigBank is large, so the rules apply. BigBank should have determined that the rules apply and issued an SDS to that effect. The SDS as issued is wrong. Delta Ltd should challenge the SDS. If BigBank fails to correct it, Delta Ltd may be liable for PAYE.

Employment status. Even if the rules apply, BigBank must determine whether Sam would be an employee. The facts suggest employment: Sam works full-time, at BigBank's premises, using BigBank's equipment, under BigBank's control, and is integrated into the organisation. These are strong indicators of employment. The contract may say otherwise, but substance over form. Therefore, Sam is likely to be deemed an employee for tax purposes. The off-payroll rules apply. BigBank should deduct PAYE and NICs from the fees paid to Delta Ltd (after 2021, the fee-payer is responsible). The fee-payer is BigBank (or an agency, but here BigBank pays Delta Ltd directly). BigBank must operate PAYE on the deemed employment payment. Delta Ltd receives the net amount. Delta Ltd can claim a credit for the PAYE deducted against its corporation tax? No, the deemed employment payment is treated as salary, so Delta Ltd's profits are reduced. The tax position is complex.

Conclusion. The SDS is incorrect because it relies on the size of Delta Ltd, not BigBank. The rules apply. BigBank should issue a new SDS. Delta Ltd should ensure BigBank complies, otherwise Delta Ltd may face tax liabilities.

Deemed employment payment. When the off-payroll rules apply, the fee-payer (BigBank) must calculate the deemed employment payment. The deemed employment payment is the amount of the fee paid to the intermediary (Delta Ltd) that is attributable to the services of Sam, less:

• any VAT charged by Delta Ltd;
• any expenses that would be allowable as a deduction from employment income if Sam were an employee (e.g., travel expenses, but not ordinary commuting);
• any employer's NICs payable by the fee-payer on the deemed payment (if the fee-payer agrees to bear them);
• any salary or wages paid by Delta Ltd to Sam for the same period. The calculation is made at the end of each tax month or at the end of the contract, depending on the method. The fee-payer must operate PAYE and deduct Class 1 NICs (employee and employer) from the deemed payment. The deemed payment is treated as employment income of Sam, and the fee-payer must report it on an FPS.

Who is liable. The fee-payer is liable for PAYE and NICs. In this case, BigBank pays Delta Ltd directly, so BigBank is the fee-payer. If there is an agency chain, the fee-payer is the entity that pays the intermediary. BigBank must deduct PAYE and NICs from the fees. If BigBank fails to do so, HMRC can recover from BigBank, and in some cases from Delta Ltd.

Relief for Delta Ltd. Delta Ltd is treated as making a deemed employment payment to Sam. The amount of the deemed payment is deductible from Delta Ltd's profits for corporation tax. However, Delta Ltd cannot deduct the salary it already paid to Sam again; the salary is already deducted. The deemed payment is the net amount after salary, so it is an additional deduction. Delta Ltd must also account for the PAYE and NICs? No, the fee-payer accounts for them. Delta Ltd should ensure it receives the net amount and records the deemed payment as an expense. Delta Ltd may also claim a credit for any tax deducted by BigBank? No, the tax is deducted from the payment to Delta Ltd, so Delta Ltd receives less cash. The deemed payment is treated as salary, so Delta Ltd's profit is reduced by the gross deemed payment (including PAYE and NICs). Delta Ltd should keep records. If BigBank deducts PAYE, Delta Ltd's income is the net amount, but for corporation tax, Delta Ltd's turnover is the gross amount, and the deemed payment is an expense. The net effect is that Delta Ltd pays corporation tax on its profit after the deemed payment.