Dispelling the Myth, is a sole trader caught by the new off-payroll rules?

The new off-payroll working rules are now in place and it is slightly disconcerting to note that there still appears to be significant misunderstanding over whether the changes affect engagements with sole traders.

We have seen examples of edicts in a supply chain coming from an end-client stating that any workers supplied post 6 April 2021, who previously were engaged under the Construction Industry Scheme (CIS), must now be subject to employment taxes deduction regardless of whether they are working through their own personal service company (PSC) or through an intermediary, such as an agency.   

We are working with our clients to provide guidance and clarity regarding the engagement of sole traders to share with their customers, to stem the misconceptions that sole traders can no longer be engaged on a self-employed basis.  

Confusion over the meaning of an ‘intermediary’

This confusion is possibly not helped by the fact that the term ‘intermediary’ cuts across different pieces of tax legislation. There is the ‘Intermediaries Legislation’, commonly referred to as IR35 which flows into the off-payroll working rules, and the ‘Employment Intermediary’ requirements, commonly referred to as the Section 44 Agency Legislation.

Further confusion perhaps arises from the unintended widening of the new off-payroll working rules, which inadvertently created a view that the Finance Act 2020 broadened the definition of an intermediary to include any company that makes a chain payment to a worker. This was not the intention and HMRC have acknowledged this, and this will be corrected in the Finance Bill 2021.

Whilst both pieces of legislation look to tackle the Government’s perceived risks of disguised employment or false self-employment, it is important to ascertain when the relevant piece of legislation would apply.

Therefore, to determine if the off-payroll rules need to be considered, it must first be established whether the individual is a sole trader or providing services through their own limited company.

What is the difference between a sole trader and a limited company?

In general terms, a sole trader is a self-employed person who is the only owner of their business and there is no legal separation between them as the business owner and the business itself.

A limited company is a distinct legal entity from the business owner that can be formed whether it is a one-person business or has employees.

IR35 and off-payroll working rules

The fundamental basis of IR35 and the off-payroll working rules involves the consideration of the underlying working relationship between an individual worker who is providing their services through their own intermediary, such as a PSC or a partnership, to an end-client, either directly or via an agency.

It is a question of employment status and whether the individual worker would be deemed to be an employee of the end-client were they not engaged via their intermediary (PSC). If the answer is yes, then the IR35 or off-payroll working rules would apply and a deemed payment is required, meaning PAYE needs to be operated.

Sole trader and IR35/off-payroll rules

A sole trader does not work through their own intermediary such as a limited company or partnership. Therefore, neither the IR35 nor off-payroll working rules need to be considered in respect of an engagement involving a sole trader.

Sole trader and employment status

Whilst the IR35 and off-payroll working rules do not apply to a sole trader, employment status does and the factors to consider when establishing whether an individual is employed or self-employed are the same as those used when looking to establish whether an engagement does or does not fall within the scope of IR35 or the off-payroll working rules.

Sole trader and Section 44 Agency legislation

For sole traders who operate through an agency, specific legislation applies. For the purposes of Section 44, an agency is any third party interposed between the worker and the client to whom they provide the services. Therefore, the legislation needs to be considered where an intermediary (e.g., an agency) is in a contractual chain between the worker and the end-client.

Where someone in the contractual chain has (or has the right of) supervision, direction, or control (SDC) over the manner in which the worker provides their services, then the agency legislation will apply, meaning the worker is treated as holding an employment with the agency and PAYE must be operated.

Where SDC does not apply, self-employed sole traders can be engaged, although the agency must hold suitable evidence to demonstrate that the worker is not subject to SDC and an employment intermediary report must also be submitted to HMRC.  

How can The Guild help?

Sole traders engaged on a compliant footing can continue to provide their services, allowing clients to benefit from a flexible workforce whilst managing their overhead costs.

The Guild has a strong background in status compliance and operate compliant solutions for the engagement of sole traders in the construction industry, thereby giving businesses the freedom to operate safely when using a self-employed workforce.