Off-payroll working rules (IR35)

Summary

How to account for off-payroll working rules (IR35) when processing in Sage 50 Payroll.

Description

The government introduced off-payroll working (IR35) in 2000. This was 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.

Since 6 April 2017, public sector authorities directly engaging a worker's PSC must deduct the relevant income tax and NICs. This deduction occurs before paying the employee.

When an employee is engaged through an agency, the public authority informs the agency of their decision. The agency must then deduct the relevant income tax and NICs before paying the worker's PSC. The party paying the worker’s PSC is responsible for paying the employers NIC for the work.

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

 NOTE: The pay for deemed employees isn't eligible for employment allowance.

Resolution

What changed?

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 the IR35 rules then they're classed as a deemed employee. Although tax and NICs should be deducted, they're not entitled to any other employee benefits. For example, statutory pay, pension or holidays.

Set your process date to on or after 6 April 2021 in Sage 50 Payroll. You can then set the Employment Type as Deemed when you add a new employee using the Employee Wizard. 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. 

Employee record with the Employment Type of Deemed.

Change an existing employee

As a Deemed employee they're not entitled to benefits such as pension, statutory payment etc. To change the Employee status of an existing employee to Deemed, rollback the employee to the period they should have first been set to Deemed. You can use the Rollback option article to do this.

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

  1. Go to Employee, open the relevant employee record.
  2. Click the Employment tab.
  3. Select the dropdown box beside Employment Type.
  4. Scroll down the list then select Deemed.
  5. Click Save, then Close.

You can no process the employee again, back up to your current pay period. Follow the steps on the reprocessing checklist article. 

Deemed Employee stop being deemed mid-year.

During the year if a deemed employee ceases being classed as deemed, make th employee a leaver, then re-employ them with a new employee record.  Before doing this we recommend speaking with HMRC first.

Solution Properties

Solution ID
200427112600130
Last Modified Date
Tue May 07 10:26:21 UTC 2024
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