FRS 105 – a new reporting regime for micro-companies


The new IR35 provisions within the public sector apply when: 

  1. A worker personally performs services, or is under obligation to personally perform services for the client
  2. The client is a public authority
  3. The services are provided under circumstances where, if the contract had been directly with the client, the worker would be regarded for Income Tax purposes as an employee of the client or the holder of an office with the client, or the worker actually is an office holder with the client.

In summary, individual worker (say, A) provided services via an intermediary (say, B) to a public authority (say, C). 

C must look at the arrangements under which A provides their services, and decides if these new rules apply. If C decides the new rules apply tax and employee’s national insurance will be deducted and the net amount paid to B. The VAT exclusive amounts must be accounted for by C through Real Time Information in the same way as for an employee.  These rules do not affect employment rights available to the worker.

The guidance from HMRC says: ‘The worker’s intermediary is able to reduce the turnover it records to reflect the deductions made from the fee from the fee payer’.

These new rules do not create any new pension obligations on the public sector, agency or third party to operate occupational or stakeholder pensions. These new rules do not affect: 

  • workers who provide their services to clients other than public authorities
  • where an agency directly employs a worker and it operates tax and NICs on earnings it pays to the worker
  • foreign entertainers who are within the statutory tax withholding scheme.

To help to decide whether the new rules apply a tool has been made available to check employment status for tax

Public sector body providing information to intermediary

The public sector client must inform the intermediary, agency, or third party with whom they have a contract to provide the services that the contract falls within the new off-payroll rules or that it does not. For contracts starting on or after 6 April 2017, this decision should be notified before the date of entry into the contract, or before the provision of the services begins. For contracts already in place before 6 April 2017, the decision should be notified before the date of the first payment made on or after 6 April 2017. 

If the public sector client fails to notify its decision within the timescale, they become liable to account for tax and NIC.

The intermediary, agency or third party with whom the public sector client has contracted directly may request a written response setting out the reasons for the decision. The public sector client must reply to the written request for the reasons within 31 days of receiving it.

The fee paid to the intermediary is treated as a payment of the worker’s employment income when it is paid. For tax, NICs and Apprenticeship Levy purposes, the worker is treated as having an employment with the fee-payer. Stakeholder pensions, statutory payments and certain other employment rights do not apply.

Intermediary paying worker a salary

The intermediary can pay the worker provided to the public sector client, through that intermediary’s payroll. The intermediary will receive a deduction up to the total of the net fee, exclusive of VAT received from the fee-payer.

In example 1 above that would be a non-taxable payment up to the total of £4,200 per month that does not require further deduction of Income Tax or NICs. An amount up to £4,200 per month can be paid by the intermediary to the worker each month through the payroll without income tax and NICs. 

The intermediary should report to HMRC non-taxable payments the intermediary pays the worker on the Full Payment Submission (FPS) that the payroll software produces.

Intermediary paying worker/shareholder a dividend

The intermediary company can pay a dividend if it has distributable reserves. If this is paid to the worker/shareholder this will be tax free up to the total of the net fee received from contracts in the public sector, where Income Tax and NICs have been deducted at source.

The worker/shareholder would not need to declare that dividend on their self-assessment return. This is assuming that the company has not paid the worker/shareholder in any other way, such as via the payroll.

Further information

HMRC has produced information on off-payroll working rules, including a technical note

The legislation that introduces these provisions is the Finance (No 2) Act 2017 Schedule 1, which amends ITEPA 2003. 

Corporation tax

The guidance from HMRC says: ‘When you are calculating your company’s income, you should deduct the total amount of the invoice, less the amount of Income Tax and NICs that were deducted at source. Your company accounts should reflect this deduction to ensure the amount is not taxed twice.’