View the related Tax Guidance about Off-payroll working
Indirect and third party relationships ― overview
Indirect and third party relationships ― overviewThere are a variety of working relationships between workers and clients. The most common relationship we address in this module is that of employee and employer; however, there are also a variety of indirect and third party relationships where the work is not carried out by an employee of the ‘client’ ― the end user of the services. There is a wide range of working relationships and these can be complex in terms of PAYE treatment (references in this topic to PAYE include income tax, NIC and other payroll costs, such as the apprenticeship levy, as relevant). The most well-known example of a third party relationship is that of a worker with their own personal service company (PSC). They are the sole director and shareholder of that PSC and the PSC has a contract to provide services to the client. The worker therefore has no direct contractual relationship with the client.Indirect and third party relationships ― signposting of main guidanceThe method by which an individual is engaged and the type of ‘client’ they work for will determine the tax and NIC considerations in most cases. The table below sets out where to find the main guidance for the more common forms of engagement:DescriptionGuidance notesEmployment status tests ― the guidance on how to assess whether a worker is an employee or not, which is the basis on which the off-payroll working rules are appliedEmployment status ― why
Off payroll working (IR35) for small clients ― calculating the deemed employment payment
Off payroll working (IR35) for small clients ― calculating the deemed employment paymentIntroduction - the deemed employment paymentThis guidance note covers the position where a contractor is working through an intermediary within the off-payroll working for small clients rules - see the Off-payroll working (IR35) ― small clients ― overview guidance note. Where these rules apply, there is a requirement for the intermediary to:•calculate the deemed employment payment (the term used for tax which is used throughout, although it is called the ‘attributable earnings’ in the NIC legislation)•calculate and pay over the tax and NIC due to HMRCThe diagram below shows the interaction of the deemed employment calculation with an intermediary structure:Tax and NIC on the deemed employment payment / attributable earningsSeparate legislation is in place for tax and NIC ― see the Off-payroll working (IR35) for small clients ― particular NIC points and tax planning guidance note for more on all of the points below.For tax, the calculation is known as the ‘deemed employment payment’ calculation, for NIC it is the ‘attributable earnings’ calculation. In most cases the calculations are identical. This note refers to both as the deemed employment payment throughout unless anything specifically only applies to NIC and not tax. Certain types of work are categorised by NIC regulations as being ‘employed earners’ and so where an individual is carrying out these types of work, NIC is applied under the off-payroll working for small clients rules even where the rules don’t apply for tax.
Doctors and dentists ― self-employed income
Doctors and dentists ― self-employed incomeNHS incomeMedical and dental practitioners working for the NHS may be either employed or self-employed. The employment status of doctors and dentists is reviewed in the Doctors and dentists ― income guidance note. General medical practitioners and general dentist practitioners who are working for the NHS are generally self-employed and receive income from the NHS under contracts for services where the value of the earnings are derived from a formula which takes into account the number of patients and performance of the practice. The performance element includes allowances for elements relating to specific items under the Quality and Outcomes Framework (QOF).Further to this, there are specific allowances relating to specific costs such as locums employed to cover maternity, paternity or sickness leave, dispensing, flexible care scheme, and so on. There are also supervision fees relating to the cost of training assistants, inducement payments for acting in certain areas and reimbursement of rents and rates for practice accommodation. These allowances are included within the practice receipts taxable as profits from a profession or vocation. For example, where an element of the practice’s fees are calculated with respect to rent, this is still treated as profits of a profession. There is an advantage to be gained by treating earnings as rent, avoiding NIC, but reimbursement of premises costs do not constitute rental income. See below for more details.Private incomeWhere a practitioner has private patients, the income will also be attributed to their profits from a profession.
IR35 ― overview
IR35 ― overviewWhat is IR35?What is referred to as IR35 has changed significantly since it was first announced in 1999, particularly since 2017. It is therefore useful to look back to understand the term, where it came from, and what it means for current taxpayers and advisers.In the March 1999 Budget, anti-avoidance measures to target the avoidance of tax and NIC by individuals providing their services through an intermediary such as a personal service company or partnership were announced. The proposals were issued in Revenue Press Release IR35 and this led to the rules becoming widely known as ‘IR35’.The first legislation in this area broadly addressed the issue of those providing their services through an intermediary that resulted in those individuals extracting profit from the intermediary as a dividend and, as such, paying lower tax and no employer or employee NIC as compared with an employee working directly for their client. As the rules have developed, they now cover a wider variety of arrangements and the responsibilities and administration around these rules are far more complex. A Commons research briefing, personal service companies & IR35 was published by the House of Commons Library in July 2020 setting out a detailed history of these rules and their development over time.The off-payroll rules (IR35) are conceptually simple. It asks only one question: ‘Would the worker have been an employee (or office-holder) of the client if they were engaged directly by the client?’ This question is known as employment status. Employment status
Directors
DirectorsMost of the rules concerning tax on employment income and National Insurance apply to company directors in exactly the same way as they do to general employees. Unless otherwise stated, when the guidance notes in this module talk about 'employees' this includes both directors and employees.The rules on the national minimum wage (NMW) / national living wage (NLW) do not apply to company directors unless they provide work or services to the company under a contract of employment (see the National minimum wage ― overview guidance note).This guidance note is concerned with the instances where special tax or NIC rules apply to directors.Income taxWho counts as a director?Although in many cases it is obvious that an individual is a director, eg because their job title says that they are, there is a definition in the legislation on employment benefits that includes a range of people who may not normally be described as directors. It specifically includes anyone who manages the affairs of a company alone, is a member of a board of directors or similar body which does so, or is a member of a company whose affairs are managed by its members. If the directors (as described above) usually act under the direction or instruction of another individual in managing the affairs of the company, that other individual also comes within the definition of director for the purposes of the benefits code. Such an individual is sometimes known as a 'shadow director' but for the purposes of the
CIS ― subcontractors
CIS ― subcontractorsThe construction industry scheme (CIS) was devised to limit the amount of tax lost as a result of under-declarations or failures to notify chargeability by subcontractors, many of whom came to work in the UK for relatively short periods without paying any tax.The scheme operates to withhold tax at source at the point when payments are made to subcontractors in respect of work which is defined as ‘construction operations’, thereby reducing the risk of a subsequent default by the subcontractor. Although, if the subcontractor can prove they have complied with their tax obligations and meet other tests (eg on prescribed level of turnover), they are able to receive payments gross. The scheme has undergone regular changes since its inception and the current regime came into effect on 6 April 2007.For a summary of the CIS, see the CIS ― overview guidance note.Who is a subcontractor?A party to a contract relating to construction operations is a subcontractor if they are under a duty to the contractor to carry out the operations, or to furnish their own labour or the labour of others in carrying out the operations. A contract relating to construction is a broad term; it can include contracts which cover a range of mixed activities of which construction operations form only a component part. Where subcontractors provide labour other than just their own, they may themselves also be contractors. For more on contractors and their responsibilities, see the CIS ― contractors guidance note.For the CIS to
Weekly tax highlights ― 2 September 2024
Weekly tax highlights ― 2 September 2024Direct taxesEU approves extension of EIS and VCTThe European Commission has approved the Government’s extension of the Enterprise Investment Scheme (EIS) and the Venture Capital Trust scheme (VCT) until 2035.The sunset dates for the EIS and VCT were extended by FA 2024 to 5 April 2035 from a date to be appointed. The Commission's approval for the extension is required under the Windsor Framework and this has now been granted as it has decided to raise no objections.See Simon’s Taxes E3.101, E3.201CIOT response: Abolition of furnished holiday lettings regime – draft legislation for consultationThe CIOT has published its response to the consultation on the draft legislation to abolish the furnished holiday lettings (FHL) tax regimeThe key points raised in the response include:•clarification is needed on the policy intent regarding the tax status of furnished holiday lettings going forward to provide certainty and avoid costly disputes in relation to claims for trading status•the draft legislation should clarify the position regarding business asset disposal relief (BADR) for disposals relating to pre-commencement FHL businesses, including whether there is a deemed cessation on 5 April 2025•guidance is needed on the application of the 50:50 income splitting rules in ITA 2007, s 836 to former FHL properties owned jointly from 6 April 2025, and the ability to backdate section 837 elections is suggested•confirmation is sought on various technical points, such as the treatment of the "relevant period" for new FHLs in 2024/25, eligibility for
Implications for the end client
Implications for the end clientThis guidance note considers the position of an end client where either the standard off-payroll (IR35) rules apply (see the Off-payroll working (IR35) for small clients - overview guidance note), a public sector body (see the Off payroll working (IR35) ― public sector, large and medium clients ― overview guidance note) or a large or medium-sized private sector body from 6 April 2021 (see the Off payroll working (IR35) ― public sector, large and medium clients ― overview guidance note). In general, this means that the end client is engaging the personal services of an individual.There are a number of advantages to the end client in engaging the services of an individual via a company rather than as an employee ie an indirect or third party relationship, whether they engage directly with an intermediary such as a PSC, or whether it is through an agency or other third party. If there is an employment relationship, the end client has to operate PAYE on the amounts paid to the employee, and has to pay NIC (for current rate, see the Overview of NIC Classes, rates and thresholds guidance note), the apprenticeship levy (if
Employment allowance
Employment allowanceWhat is the employment allowance?The employment allowance is available to most small employers, reducing their liability to secondary Class 1 national insurance contributions (NIC). Between 6 April 2020 and 5 April 2025, this is restricted to those employers with an employer’s NIC liability under £100,000. It is a flat rate reduction in the overall amount that most employers have to pay in secondary NIC in respect of their employees. The employment allowance is £10,500 from 6 April 2025, having previously been set at £5,000 between tax years 2022/23 and 2024/25, and at £4,000 between 2020/21 and 2021/22. In its Autumn Budget 2024, the Government confirmed two significant changes to the Employment Allowance, from 6 April 2025. Firstly, the allowance itself was increased substantially, to £10,500 from £5,000 per annum. Also, the restriction limiting the allowance to those with an employer’s NIC liability under £100,000 pa is removed, meaning that the allowance will no longer be limited to ‘small’ employers from 2025/26. Other qualification factors (see below) will however remain unchanged. The extra allowance will at least offset, partially, the general employer NIC increases which apply from 6 April 2025, as set out in the Overview of NIC Classes, rates and thresholds guidance note.See National Insurance Contributions (Secondary Class 1 Contributions) Bill, cl 3 and Autumn Budget 2024 ― Overview of tax legislation and rates (OOTLAR), para 2.3.As set out in SI 2020/218, it is available on the following basis:•if, up to 2024/25, the previous tax year’s total
Establishing employment status
Establishing employment statusAnne is a barrister who sits as a judge of the Upper Tribunal (Tax and Chancery Chamber) and the First-tier Tax Tribunal. The commentary in this guidance note is her personal view as she is not authorised to write on behalf of the Tribunals Service or the judiciary.This note explains how to work out whether a person is employed or self-employed. It considers the NIC deeming rules, the contractual relationship between the parties, HMRC’s Check Employment Status for Tax (‘CEST’) online tool and the HMRC status determinations, together with how these can be challenged. The reasons why status is important are explained in the Employment status ― why it matters guidance note.Further changes are likely in the near future, as the labour government moves forward with the proposals in its ‘Plan to make work pay’ (published on The Labour Party site ― https://labour.org.uk).Remember that this note, and the other notes on employment status, are only a summary, and you may need to take further advice. For the position where individuals are working through personal service companies, see the Off-payroll working (IR35) for small clients ― overview guidance note.The contractFor tax purposes, the question of whether people are employed or self-employed is established by the contracts between individuals and their engagers, together with the case law that has built up from interpreting such contracts. The position is usually the same for NIC, unless certain deeming rules apply. These are discussed at the end of this note.Sometimes the contract
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