IR35 legislation rules apply if you have a contractor/worker who provides their services through an intermediary, but would be classed as an employee if they were contracted directly. It is the responsibility of the engager, hirer or end client to determine if the off-payroll working rules apply.
From April 2021 the legislation now applies to medium and large private sector clients.
HMRC have provided an on-line tool to assist determining if off-payroll rules apply called CEST (Check Employment Status for Tax).
Key Points
- The rules apply on a contract basis so a check needs to be made for any new contract, you may have some contracts with the same worker that fall within the rules and some that don't.
- If the IR35 rules apply the contractor will be classed as a deemed employee, any part of an invoice that relates to work is subject to tax and class 1 NI contributions.
- The deemed employer is not obliged to offer membership of a pension scheme, this includes auto enrolment.
- Deemed employees are not entitled to any holiday, sickness or parental payments and student/post grad loan deductions should not be made.
- The employer's NI is not included in the calculations for employment allowance.
- Apprenticeship levy calculations should be applied for deemed employees.
- When a deemed employee finishes they should receive a P45.
- Deemed employees can also be given a P60.
- The date the payment is actually made determines the tax period.
Adding a Deemed Employee
You can add a deemed employee as you would a normal employee, guidance on this can be found here. When you get to the 'tax and NI details' page in the new employee wizard, under the IR35 section you can select if IR35 legislation applies.
Once the employee has been set up they will be identified as an IR35 contractor in the employee details.
You can then process and include the deemed employee in a pay run to calculate tax and NICS due. Guidance on how to process pay runs can be found here.
Useful Tips
- For reporting purposes you can set up a separate location for deemed employees, which then gives you the option to report specifically on deemed employees. Guidance on location setup can be found here.
- You can also set up a separate pay schedule, this would allow you to create pay runs for deemed employees if you wanted to keep these separate from normal employee pay runs. Guidance on pay schedule set up can be found here.
- You can keep a copy of the CEST result as a PDF uploaded to the deemed employee within the documents section of the employee details.
- A link to the HMRC CEST tool can be found on the Employee List page.
Further guidance about IR35 legislation can be found here.