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Off-payroll working rules (IR35)

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Summary

This guide explains how to account for off-payroll working rules (IR35) when processing in Sage 50 Payroll.

Description

Off-payroll working (IR35) was introduced in 2000 to ensure that people working through a Personal Service Company (PSC), who would have been regarded as employees if they were directly engaged by the client, pay broadly the same tax and national insurance (NI) as if they were employed.

From 6 April 2017, in the public sector, if the authority is directly engaging the worker’s PSC, they're required to deduct the relevant income tax and NICs before they pay the employee.

If the employee is engaged through an agency, the public authority pass on their decision and the agency paying the worker’s PSC is required to deduct the relevant income tax and NICs before paying the employee. The party paying the worker’s PSC is responsible for paying employer NICs for the work.

There are some important changes to the off-payroll working rules (IR35) from 6 April 2021.

 NOTE: Don't forget, the pay for deemed employees is not eligible for employment allowance.

What's changing?

Autumn Budget 2018 announced the extension of off-payroll working rules to medium and large-sized organisations in the private and third sectors from April 2021. The extension doesn't apply to small organisations.

To qualify as a small organisation:

  • A small unincorporated company (subject to the Companies Act 2006) must meet two of the following criteria:
    • Fewer than 50 employees.
    • Annual turnover of less than £10.2m.
    • Total balance sheet assets of less than £5.1m.
  • A small unincorporated organisation must have an annual turnover of less than £10.2m.

What do I need to do?

New employee

If an employee is assessed to be inside of the IR35 rules then they're classed as a deemed employee. This means that although tax and NICs should be deducted, they're not entitled to any other employee benefits, such as statutory pay, pension or holidays.

When your process date is set to on or after 6 April 2021 in Sage 50 Payroll, you can set the employment type as Deemed when you create a new employee. When you set the employee to deemed, the full payment submission (FPS) includes the relevant flag to notify HMRC that they're a deemed employee.

CAUTION: When you create the new employee, to avoid them being picked up in e-Banking, we recommend setting their Payment Method to Cash. 

Change an existing employee

As a Deemed employee is not entitled to benefits such as pension, statutory payment etc, if you need to change the Employee status of an existing employee to Deemed, you should first rollback the employee to the period when they should have first been set to Deemed. You can use our Correct a previous payroll run guide to do this.

You can then change the Employment type of the employee to Deemed:

  1. Open the relevant employee record.
  2. Click the Employment tab.
  3. Click the dropdown box beside Employment Type.
  4. Scroll down the list then click Deemed.
  5. Click Save, then Close.

You can now process the employee again, back up to your current pay period. You can use our handy Reprocessing checklist to do this.

Deemed Employee stop being deemed mid-year.

During the year if a deemed employee ceases being classed as deemed, the employee would need to be made a leaver then re-employed with a new employee record.  Before doing this we recommend speaking with HMRC first.