Off-Payroll Contractual chain examples and explanations

The new off-payroll legislation will require all parties to establish where they sit within the contractual chain and how their position will impact on the steps they need to take to meet the requirements of the new rules.

The following examples provide a guide to the possible situations in which a party may find itself and advises on what action should be taken to maintain compliance.

Example 1: End-client is a small business 

As the small exemption applies, the responsibility sits with the PSC to determine if the IR35 legislation applies to the engagement. The end-client can continue to pay the PSC as normal and does not need to deduct anything from the payment in respect of the off-payroll working rules.

Example 2: End-client is a medium or large business or public body

As the end-client is a medium or large business or public body, it will have to carry out a status determination for the individual worker and provide a status determination statement (SDS) to the worker. The end-client is not required to provide an SDS to the PSC, as the end-client is considered to be the fee-payer. The individual worker can challenge the SDS made by the end-client.

If the off-payroll rules apply, the end-client will be responsible for calculating the deemed direct payment and deducting PAYE tax and Class 1 NIC from the payment due to the PSC and remitting this to HMRC through the business’ real time information submissions.

If the off-payroll rules do not apply, the end-client can continue to pay the PSC as normal and does not need to consider any deemed direct payment deductions.

Example 3: End-client is a small business plus additional intermediary

As the small exemption applies, the responsibility sits with the PSC to determine if the IR35 legislation applies to the engagement. The agency can continue to pay the PSC as normal and does not need to deduct anything from the payment in respect of the off-payroll working rules.

Example 4: End-client is a medium or large business or public body plus additional Intermediary

The end-client has to carry out a status determination and pass the SDS to the agency (the party in the chain with whom they have a contract) and the individual worker.

The agency is the fee-payer in the above supply chain, so will be responsible for implementing the result of the status determination and withholding PAYE tax and Class 1 NIC on the payment to the PSC, where the SDS advises that the new off-payroll rules apply.

If the SDS advises that the new off-payroll rules do not apply, the agency can continue to pay the PSC as normal and does not need to deduct anything from the payment in respect of the off-payroll working rules.

The end-client needs to be aware that both the agency and the individual worker can challenge the status determination they have made.

Example 5: End-client is a small business plus additional intermediaries

As the small exemption applies, the responsibility sits with the PSC to determine if the IR35 legislation applies to the engagement with the end-client.

Example 6: End-client is a medium or large business or public body plus additional intermediaries

The end-client has to carry out a status determination and pass the SDS to agency 1 (the party in the chain with whom they have a contract) and the individual worker.

Agency 1 has to pass the SDS to agency 2 and, as there are no other persons between agency 2 and the PSC in the contractual chain, agency 2 (as the fee-payer) will be responsible for implementing the result of the status determination and withholding PAYE tax and Class 1 NIC on the payment to the PSC, where the SDS advises that the new off-payroll rules apply.

If the SDS advises that the new off-payroll rules do not apply, then agency 2 can continue to pay the PSC as normal and does not need to deduct anything from the payment in respect of the off-payroll working rules.

The end-client needs to be aware that both agency 2 and the individual worker can challenge the status determination they have made.

Other Considerations 

Where any party in the contractual chain does not pass the SDS to the next relevant party, they remain the fee-payer until the SDS is passed on. As the fee-payer, they will be responsible for operating PAYE tax and Class 1 NIC on the deemed direct payment for engagements where the off-payroll rules apply.

Therefore, agencies and other parties in the contractual chain need to establish where they sit within a chain in order to determine their responsibilities.

There can be further considerations in more complex chains, especially where there may be offshore agencies and those offshore agencies are not ‘qualifying persons’ for the purposes of the off-payroll rules. A UK agency will need to establish if they could become the lowest qualifying person in the contractual chain.