What is Off-Payroll Working?

The accounting treatment formerly known as IR35.

Back in 1999, when the Millennium Bug was the issue of the day and Gordon Brown was the Chancellor, there was a huge rise in IT contractors hired on a project basis to address the concern that the lights would go out on 1 January 2000. At the time it was advantageous to set up as a limited company (often called a Personal Service Company or PSC) and invoice the customer for the project. This often resulted in a lower tax bill for the contractor and saved the customer the responsibilities of being an employer, including providing employment rights and paying employer’s national insurance. Everyone wins, except the Treasury.

Inland Revenue Press Release 35 (IR35) was born, but for many contractors it was still possible to contract through a PSC within the rules. A new plan was needed, and the much less catchy Off Payroll Working (OPW) rules were finally extended from the public sector to medium and large organisations in April 2021.

By this point the gig economy had well and truly arrived, with organisations utilising the “self-employed” to deliver to their customers, resulting in a lack of employment protection for workers and employment taxes for the Treasury. Cue some big legal cases (think taxis and food deliveries) which are still subject to appeal. If in doubt, assume you need to put people who work for you on the payroll, gov.uk has some good guidance here.    

In the intervening two decades there have been plenty of changes to Income and Corporation Taxes meaning the advantages of trading through a limited company have generally reduced. In preparation for OPW, organisations (Hirers) have broadly followed one of two approaches:

  1. Employ contractors directly, using fixed term contracts where there is a short-term need (e.g. projects and parental leave cover).
  2. OPW contractors are deemed employees, so are paid as employees for tax purposes but are legally not employees. Needless to say this results in some pretty wacky accounting. Umbrella companies (Intermediaries, sometimes also agencies) have stepped up to bridge the gap across these choppy waters, charging the Hirer for the contractors services and employing and paying the contractor. If you are considering crossing this bridge, do your research first.

Convoluted accounting and tax schemes aren’t our area of expertise. So here are our top tips:

  1. Use the gov.uk CEST Tool to Check Employment Status for Tax if you are a contractor or using contractors. Save the result in the event this is queried by HMRC.
  2. If you think you should be employed directly, ask if you can be taken on as a fixed-term contractor. If you feel pressured to sign up to legal and tax practices that you do not understand and/or feel comfortable with, be brave and walk away.
  3. If you are employed as a contractor, you can use the CEST Tool and request a Status Determination for Tax (it is the Hirer’s responsibility to issue). Deemed employees are not legal employees so ensure your rate reflects this and any additional time and costs needed to ensure you comply*. Get in touch with a specialist accountant, who is a member of a recognised Institute with professional indemnity insurance.

*Marginal tax rates are a whole other blog, but as a rule of thumb add 50% to your rate as a basic rate taxpayer, and 75% to your rate as a higher rate taxpayer to ensure you are not out of pocket for costs wholly and exclusively relating to your contract which you will not be reimbursed for.

e.g. £200 tax advice for a contract: £200 + 50% = add £300 (less 20% basic rate tax + 12% national insurance) = £204 net payment £200 + 75% = add £350 (less 40% basic rate tax + 2% national insurance) = £203 net payment

Further Reading

CEST https://www.gov.uk/guidance/check-employment-status-for-tax

ACAS https://www.acas.org.uk/checking-your-employment-rights

Employment Status https://www.gov.uk/employment-status


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