Off-Payroll workers – IR35 – Deemed Employees

Additional Off-payroll worker legislation was introduced in April 2021 (delayed from April 2020). If your Business engages contractors, you may have legal duties.

On Friday 23rd September 2022, the Chancellor announced that the off-payroll legislation for both public and private engagers would be withdrawn and not operate from 6th April 2023. However, on 17th October 2022 many of the Growth Plan proposals were reversed and off-payroll rules continue.

From 6th April 2021 through 5th April 2022

Public sector organisations were already responsible (since April 2017) for deciding if off-payroll rules apply.

Since 6th April 2021 Private sector medium and large organisations additionally became responsible for deciding worker status and if the off-payroll working rules apply.

The determination must be given to the worker and business they contract with.

Responsibilities of the fee-payer

If off-payroll rules apply:

  • calculate the deemed direct payment
  • deduct tax and employee National Insurance contributions
  • pay employer National Insurance contributions
  • report to HMRC through Real Time Information
  • apply apprenticeship levy

Employment allowance cannot be used against payments to deemed employees.

How to calculate deemed direct payments

The deemed direct payment is the amount paid to the worker’s intermediary treated as off-payroll earnings:

  1. Work out the value of the payment having deducted any VAT.
  2. Deduct the direct costs of materials in providing the services.
  3. Deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
  4. The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.

Then deduct tax and employee National Insurance contributions as appropriate from the deemed direct payment. You also need to pay employer National Insurance contributions.

Report the pay and deductions to HMRC using a Full Payment Submission. Inform cate that the individual 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.

Tax and National Insurance contributions

Give the worker a new starter checklist. This will decide the worker’s tax code. The tax code will often be ‘BR’, as the worker will have a primary employment with their own intermediary.

You must use the normal National Insurance rates and thresholds on the value of the deemed payment.

A Deemed employee is different to an actual employee

Deemed employees are not actual employees of the engager but an employee of their own intermediary. The deemed employment relates to liabilities for Income Tax and National Insurance only,

Do not apply: Student loan repayments, holiday pay, statutory payments and auto-enrolment

There is no responsibility for deducting student loan repayments for workers engaged through their own companies. The worker will account for student loan obligations in their own tax return.

As they are not your employee they are not entitled to:

  • statutory payments
  • be automatically enrolled into a pension

The worker’s entitlement to statutory payments comes through their employment with their intermediary. They can also contribute to a pension as an employee of their intermediary.

Workers providing services through intermediaries are also not entitled to employment rights from you, such as holiday pay.

Do not apply Attachment Of Earnings (AEO) or Earnings Arrestments (EA)

If you receive an AEO or EA ordering deductions from earnings, do not apply the order to deemed employees as they are not employees and the order should be returned to the issuing authority confirming that the individual is not an employee.

PAYadvice articles on Off-Payroll Workers / Deemed employees

Off-payroll operation was implemented in April 2021.

HMRC resources

The following buttons link to various HMRC resources.

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PAYadvice.UK 18/10/2020 updated 19/10/2022