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.
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
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). This is restricted to those employers with an employer’s NIC liability under £100,000 from 6 April 2020. 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 set at £5,000 from 2022/23, having previously been £4,000 from 2020/21. Since 6 April 2020, as set out in SI 2020/218, it is available if:•the previous tax year’s total employers’ (ie secondary) NIC liability must be less than £100,000•claims will need to be submitted every year and cannot be rolled over from one year to the nextEmployer Bulletin 80When an employee’s pay is more than the secondary threshold (see the Overview of NIC Classes, rates and thresholds guidance note), the employer has to pay Class 1 employer NIC in addition to having to deduct Class 1 NIC from the employee’s wages.Secondary NIC due is due on any amount of the employee’s pay over the Secondary threshold. This secondary contribution is calculated and paid over to HMRC as part of the employer’s normal PAYE operations using the Real Time Information (RTI) system. See the Overview of NIC Classes, rates and thresholds guidance note for more about NIC on employment income.Employment Allowance eligibilityHMRC has published free-standing guidance on eligibility for the employment allowance and how to claim it, as
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.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 between the engager and the individual will be written, sometimes oral, and sometimes part-oral, part-written. It is naturally more difficult to establish the terms of an oral contract, and it is
Partnership anti-avoidance provisions
Partnership anti-avoidance provisionsThis guidance notes covers some of the key provisions in a number of anti-avoidance provisions which may be relevant in the context of partnership planning. The rules should be properly applied according to the facts of each case.Mixed partnerships and profit allocationsA mixed partnership is a partnership made up of a mixture of individual and non-individual members. Non-individual members are often companies but could also be trusts or even LLPs. Legislation tackles tax motivated allocations of business profits or losses in partnerships made up of both individual and non-individual members. This is needed because individual members of a partnership may pay income tax at the higher rates compared to a corporate member, see the Computation of corporation tax guidance note for more information). Therefore, in some cases, it may be possible to allocate excessive profits to a corporate member which would then be subject to lower corporation tax rates rather than higher income tax rates. Further, excessive losses could be allocated to an individual enabling them to benefit from tax relief at higher income tax rates. These rules allow HMRC to reallocate the profit share of a company to an individual, or reallocate the losses of an individual, where amounts are deemed to be ‘excessive’.For more details, see the Allocation of partnership profit or loss guidance note and Simon’s Taxes B7.504.Transfers of assets and income streams through partnershipsWhere one of the main purposes of an arrangement involving the disposal of assets or income streams through a partnership
Choosing the business vehicle
Choosing the business vehicleWhen a person decides to start in business, consideration should be given as to the most suitable type of entity for the business. This decision will depend on legal, commercial and administrative factors, as well as taxation.When advising on which type of business vehicle to choose, this guidance note summarises the main tax considerations in deciding which business structure is appropriate for the business owner. A comparison document which summarises both practical and tax differences can be found in the Starting the business ― overview guidance note, together with checklists of the various issues to consider.Differing rates of taxRates of tax and NIC are different depending on the type of business vehicle used. In 2024/25 and 2023/24, the following paragraphs summarise the rates which apply.Sole trader or partner in a partnershipA sole trader or partner in a partnership will pay income tax at rates of 0%, 20%, 40% and 45% (for both 2024/25 and 2023/24) on the profits generated by the business they run, depending on the level of profits they generate and the other income they have. See the Proforma income tax calculation guidance note.They will pay NIC of Class 2 at £3.45 per week for 2023/24 (but the obligation to pay Class 2 NIC has been removed from April 2024) together with and Class 4 at 0%, 6% and 2% of profits in 2024/25 (0%, 9% and 2% for 2023/24) depending on the level of profits generated. See the Class 2 national insurance contributions
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.