Since 6th April 2021, clients have been responsible for determining their contract workers' employment status and communicating this along their supply chain.
So, what are your responsibilities if you're the fee payer in the supply chain where the IR35 rules apply and your contractor wishes to engage via their PSC?
Firstly, in most cases you will be the fee-payer if you are 'closest to the PSC in the chain or the party paying the workers intermediary direct (PSC)’.
HMRC's guidance allows you to check who qualifies as the deemed employer under IR35.
Fee payer responsibilities under IR35
HMRC also states the following as your new responsibilities as the fee-payer;
When you receive the worker’s employment status determination and the off-payroll working rules apply, you must:
- Calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
- Deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
- Pay employer National Insurance contributions
- Report to HMRC through Real Time Information the taxes and National Insurance contributions deducted
- Apply the Apprenticeship Levy and make any payments necessary
Employment allowance cannot be used against payments to deemed employees.
Check here for further guidance on operating PAYE.
Deemed Direct Payments
The IR35 legislation states the fee payer must ‘calculate the deemed direct payment to account for employment taxes and National insurance contributions associated with the contract’. However, it’s important for the fee payer to understand that the ‘deemed direct payments’ should not be confused with the previous IR35 legislation of ‘deemed payment’.
‘Deemed payment’ in the previous IR35 legislation meant the contractor would set aside 5% for expenses and the remainder amount was called the ‘gross cost of hire’. Employee and employer deductions were then deducted from this amount such as employee and employers NIC’s and paid across to HMRC from the contractors intermediary (PSC). It’s important to bear in mind HMRC confirms that ‘deemed direct payments’ in the new IR35 legislation now states the following way to calculate deemed direct payments, for contractors operating via their PSC but whereby the off payroll working rules apply;
The deemed direct payment is the amount paid to the worker’s intermediary that should be treated as earnings for the purposes of the off-payroll rules.
- Work out the value of the payment to the worker’s intermediary, having deducted any VAT.
- Deduct the direct costs of materials that have, or will be, used in providing their services.
- Deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
- The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.
You then need to deduct tax and employee National Insurance contributions as appropriate from the deemed direct payment. You also need to pay employer National Insurance contributions.
What next?
You’ll need to report the pay and deductions you make to HMRC using a Full Payment Submission, as you do for workers on your payroll. You should indicate that this person is an off-payroll worker. You do not have to add these workers to your existing payroll, but you can do this if you wish. If the payments are not reported under your existing PAYE scheme, then you’ll have to open a new one. You should keep records of any payments as well as amounts of Income Tax and National Insurance contributions deducted.
Employer National Insurance Contributions and Apprenticeship Levy
As confirmed above by HMRC, it's the ‘fee payers’ responsibility to pay the employers NI contributions (13.8%) and apply the Apprenticeship Levy if required (0.5%). It’s widely accepted that fee payers will ultimately expect the end client to cover this cost and so agencies or payroll companies will need to negotiate higher margins to cover this cost.
The worker is not your employee, so you are not responsible for calculating and deducting;
- Student loan payments
- Pension contributions
- Statutory payments
- Holiday pay