How do the off-payroll working rules apply to the private sector?

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Here is a comprehensive answer on how the off-payroll working rules apply to the private sector.

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## How the Off-Payroll Working Rules Apply to the Private Sector

### What the law says

The off-payroll working rules are contained in **Chapter 10, Part 2 ITEPA 2003** (income tax) and **Part 2 of the Social Security Contributions (Intermediaries) Regulations 2000** (NICs). The rules were extended to medium and large-sized non-public sector clients from **6 April 2021**.

**Scope — who must apply the rules**

A client must consider the off-payroll working legislation where it is either a public authority or a **medium or large-sized non-public sector organisation** (including voluntary sector organisations such as charities). **Small non-public sector organisations do not need to consider the rules** — in those cases, the worker's intermediary remains responsible for determining whether the rules apply under Chapter 8, Part 2 ITEPA 2003.

**Size thresholds for corporate entities**

A corporate entity (including LLPs, overseas companies and unregistered companies) is **medium or large-sized** if it meets at least **two of the following criteria for two consecutive financial years** (based on the Small Companies Regime under s.382 Companies Act 2006):
- Turnover of more than **£10.2 million**
- Balance sheet total (assets) of more than **£5.1 million**
- Average of more than **50 employees**

Similarly, a corporate entity ceases to be medium or large-sized if it no longer meets at least two of these criteria for two consecutive financial years.

**Conditions for the rules to apply**

The rules apply where:
1. An individual (the worker) personally performs, or is under an obligation to personally perform, services for a client who is a public authority or medium/large-sized organisation;
2. The arrangements involve an intermediary; and
3. The circumstances are such that, if the contract had been made directly between the client and the worker, the worker would be regarded as an employee (or office holder) of the client.

**Size conditions apply only to clients, not agencies**

The size conditions only apply to clients. The size of the agency or fee-payer is irrelevant — a small-sized fee-payer will still be responsible for applying the off-payroll working rules once the SDS has been passed to them.

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### HMRC guidance / practice

**Client's responsibility: Status Determination Statement (SDS)**

It is the medium or large-sized non-public sector client's responsibility to determine whether an engagement is within scope and to communicate that decision in the form of a **Status Determination Statement (SDS)** to the worker and any third party it contracts with. Failure to pass on the SDS results in the client being responsible for the deduction of tax, NICs, and apprenticeship levy.

**Deemed employer and PAYE obligations**

Where the client is also the deemed employer, it is responsible for operating PAYE — deducting income tax and NICs, accounting for the apprenticeship levy, and paying these to HMRC. Where there is an agency in the chain, the SDS must be passed down the chain; the agency that receives the SDS and sits immediately above the worker's intermediary (the **fee-payer**) becomes the deemed employer responsible for operating PAYE.

**Worker's right to request size confirmation**

A worker has the right to request confirmation of a client's size. The client must respond within **45 days** of receiving the request (under s.60H ITEPA 2003). If the client does not issue an SDS and is not a small non-public sector client, any potential liability for tax, NICs, and apprenticeship levy rests with the client.

**Interaction with CIS**

Where payments are subject to PAYE under Chapter 10/Part 2, the Construction Industry Scheme (CIS) does not need to be considered. However, where the client is a small non-public sector organisation (so Chapter 10 does not apply), the client must still consider whether tax needs to be withheld on payments to the worker's intermediary under CIS.

**Practical example**

Where a medium-sized business (e.g. Retail Ltd) contracts directly with a worker's PSC and determines the engagement is inside the rules, it must provide the SDS to the worker and is responsible for deducting tax and NICs as the deemed employer. Where an agency is in the chain, the SDS must be passed to the agency, which then becomes the fee-payer and deemed employer responsible for PAYE.

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