Are you going to have Off Payroll Worker (IR35) payroll process responsibilities from April 2021?
The extended IR35 rules are coming in from 6 April 2021 applying to contracts with public sector and large and medium size private sector end clients. A contract is within IR35 where an individual would have been an employee of the end client for tax purposes if it were not for the other parties in the supply chain. These changes could mean that you have extra employment tax and payroll processing responsibilities for contractors in addition to your own employees.
Key changes for payroll from 6 April 2021
- The responsibility for determining whether contractors are captured by IR35 has shifted from the contractor’s intermediary to the end client. The end client needs to make the assessment and share the SDS (Status Determination Statement) with the contractor.
- If a contractor is subject to IR35 and therefore classified as an Off Payroll Worker (OPW), the fee payer (the organisation paying the contractor’s company) is responsible for payroll reporting and the deduction of NI and tax.
- The end client is responsible for passing the SDS to both the contractor and the next company down the supply chain. The SDS is passed down the chain until it reaches the fee-payer. When the fee-payer gets the SDS they must process the relevant payments through payroll and no longer pay the invoices gross. If the end client fails to prepare or provide a SDS then they will have the fee-payer payroll obligations.
Payroll considerations for the ‘fee payer’ of the Off Payroll Worker (contractor)
Key payroll operational points:
- Payroll teams must use the Starter Checklist to set up the OPW. A P45 cannot be used.
- A BR tax code will typically be used but you must use the tax code as per the statement ticked on the Starter Checklist.
- You must report the pay and deductions you make to HMRC using a Full Payment Submission, as you do for employees. You should indicate that this individual is an off-payroll worker.
- Student or Post Graduate loans must not be deducted.
- Statutory payments (e.g. sick pay, holiday pay, maternity/paternity pay) do not apply. It is important to remember that OPW (i.e. contractors within IR35) are not afforded the same employment rights as employees.
- OPW must not be auto enrolled into the workplace pension.
- Do not enter a salary as you only process the invoice value less VAT.
Internal discussions and agreements on process:
- It is a good initial step to bring internal departments together to ensure everyone understands the rules and to assess your current contractor positions. It is helpful to have a clear picture of how many contractors are subject to IR35 so you can plan for increased costs, implementing new processes and ensuring your payroll is able to manage the new process effectively. If you are not both the fee-payer and end client, then communication with your supply chain and end clients is essential to manage the process smoothly.
- It is important to agree with your outsourced Payroll provider or internal Payroll department whether you want to set up a separate payroll for OPW. This can take time to arrange so it is recommended this is decided on promptly. We would advise it is beneficial to operate a separate payroll as limits compliance risk as well as providing your Finance teams with clean and clear data.
- Do you want to set up new cost centres and wage code to enable effective internal reporting and payroll processing? If yes, it is important to agree the details and agree deadlines for implementation and communication ahead of 6 April 2021.
- How will you pay the invoice from the contractor’s company? Will this be your Payroll department or Finance? It is important to remember expenses and VAT will need paid as well. If Finance is to make the payment, ensure you have an agreed communication process with the Payroll team to share the final net invoice value to be paid.
Q. Should we set up a separate payroll for Off Payroll Workers?
A: It is highly recommended to have a separate Payroll for OPW. It will limit risk of non-compliance and keep the processes very clean from an accounting perspective. It will also enable separate reporting, so OPW are not captured within employee data analysis. You can also have clear visibility over the additional tax, NI and apprenticeship levy costs that OPW are creating.
Q. Can Off Payroll Workers opt into the pension?
A: OPW are deemed employees for tax purposes only so not entitled to opt into the work place pension. Pension and statutory payments should be managed by the contractor through their personal services company.
Q. Do you provide a payslip to Off Payroll Workers?
A: Yes you should provide a payslip. When the OPW ends their contract you must provide them with a P45. If they are still working after the end of the tax year, you must provide a P60 for that tax year.
Q. If an Off Payroll Worker becomes an employee, are we allowed to move them from one payroll to another?
A: In this scenario, you need to make them a leaver on the OPW payroll and new starter on your main Payroll.
Q. If a contractor issues an arrears invoice with services provided pre-April 2021, do we need to report this value through the payroll?
A: No, you only process the invoice value for services provided on or after 6 April
2021. It is important to communicate this internally to ensure the OPW provides separate invoices for services provided pre 6 April and your internal finance team are also offered clear guidance.
The CEST tool can be found on the HMRC website here.
For further information or support in ensuring you are meeting the new payroll obligations under the extended IR35 rules, please do not hesitate to contact us.
Off-payroll working (IR35)
From 6 April 2021, new tax rules for off-payroll working, often referred to as IR35, will be
extended to cover both public and private sector contracts.
Find out more >
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