Off-payroll working in the public sector – reform of intermediaries legislation (IR35) from 6 April 2017

16th March 2017

From April 2017 the responsibility for deciding if the intermediaries legislation (IR35) should be applied moves from the worker’s intermediary (a personal service company (PSC) in most cases) to the public authority engaging the worker/contractor through the supplying service provider. These are the key changes affecting contractor PSC’s

The definition of a public authority is any entity covered by the requirements of the Freedom of Information Act, including government departments and their executive agencies, universities, local authorities and NHS. (More details regarding the new legislation changes can be accessed here: https://www.gov.uk/guidance/off-payroll-working-in-the-public-sector-reform-of-intermediaries-legislation

This change does not affect:

  • Workers who only provide their services to private sector organisations
  • Fully contracted out services delivered in the public sector
  • Where an agency directly employs a worker and it operates PAYE and NICs on earnings it pays to the worker;
  • Managed service companies
  • Foreign entertainers who are within the statutory tax withholding scheme

HMRC have now released a new online service called, the Employment Status Service (ESS). They said in their press release that the tool is designed to provide clarity around IR35 status and has been released to assist public sector clients and agencies in making IR35 determinations under the new rules. The ultimate decision is to be taken by the public authority (the fee payer) as to whether, or not, the off‐payroll working rules should apply.

The ESS tool can also be used to enable workers/contractors in the public sector to obtain the HMRC view of whether their current and any prospective contracts fall within or outside of the new legislation. The ESS tool can also be used for those who carry out work in the private sector to check whether the existing IR35 rules should be applied by their intermediary.

Many commentators have drawn attention to the fact that the new ESS tool is untested against the very complex legal determination of IR35 status, and few think that it will provide the clarity that HMRC hold out for it. Be that as it may, it is the tool by which many public sector contracts will be decided from April 2017. (You can access the tool here: https://www.tax.service.gov.uk/check-employment-status-for-tax/setup

The 5% allowance currently available to those who apply the off-payroll rules to reflect the costs of administering the existing IR35 rules will be removed for those who work in the public sector. These changes will also introduce a requirement for public sector bodies to provide information to agencies and workers about whether engagements are within the off-payroll rules.

What happens if your current or prospective contractual relationship does not permit you to continue as an off-payroll worker?

Off-payroll working in the public sector legislation applies to payments made on or after 6 April 2017. The measure applies to contracts entered into before that date and if work is completed before 6 April 2017 but payment made on or after 6 April 2017 it will be within the new legislation.

This new taxation mechanism can best be characterised as a withholding tax with restricted double tax offset, calculated by reference to some features of the PAYE Regulations, but with twists and exceptions.

Where the new legislation applies, the fee payer (the public authority, agency, or other third party paying the intermediary PSC) will calculate Income Tax and primary (employee) National Insurance contributions (NICs) and pay them over to HMRC. These amounts will be deducted from the intermediary’s fee for the work provided. There is a step chain process to calculate the amount of the deemed payment, which takes into account, VAT, materials supplied and expenses billed to the end user. Expenses are restricted to those that would have been deducted if the worker had been the client’s employee and the expenses had been met by the worker out of those earnings.

The fee-payer (the public authority, agency, or other third party paying the intermediary) will calculate Income Tax and primary (employee) National Insurance contributions (NICs) on the deemed payment and pay them over to HMRC. These amounts will be deducted from the intermediary’s invoiced fee for the work provided. The fee-payer will also bear the cost of the employer NICs which it also pays to HMRC.

There is no requirement for the fee payer to give the worker a payslip, but a P45 will be provided at the end of the contract, and P60’s will also be issued.

The resultant net payment to the worker’s intermediary PSC is able to set against its own Income Tax and NICs liability in the tax year, an amount equivalent to the payment received from the fee-payer which has already had Income Tax and NICs deducted.

HMRC have issued targeted guidance to the different contracting parties regarding what is expected of them in the introduction of this measure, but there has been no piloting, and many errors can be expected to occur in the next few months.

The worker, working through a PSC or other intermediary has responsibility as follows:

  • provide the fee-payer (public sector client, or agency, or other third party) with the information they need to help determine whether the off-payroll rules should apply;
  • where the off-payroll working rules apply, provide the fee-payer with the information required to allow them to deduct tax and NICs from the payment they make to the intermediary;
  • Reporting to HMRC on own, and company’s tax affairs

 

How then does the worker pay himself from the intermediary PSC?

The new rules will allow you to extract profits from the company profits by way of salary, bonus payments, and/or dividends up to the value of the net deemed direct payment, i.e., net pay after employees PAYE and NIC deductions (see the above reference to step chain process). Payments to yourself through the payroll, up to the limit of the deemed payment amount, will be processed as non-taxable amounts for RTI PAYE purposes. You can also choose to pay yourself dividends, although the implications of doing so, particularly if there are other shareholders in the company, should be considered very carefully. There will be no double taxation, as long as the worker receives the full amount of the net deemed payment in the relevant tax year.

If dividends are paid within the limit of the net deemed payment they do not need to be declared on your self-assessment tax return.

There is no appeal mechanism under the new arrangements but if a worker thinks they have been taxed incorrectly, they can submit a repayment claim to HMRC. HMRC will then determine if they are due a repayment of Income Tax or NICs and repay as appropriate. Please refer to guidance on tax overpayments and underpayment:

https://www.gov.uk/tax-overpayments-and-underpayments/tax-calculation

The other costs of running your PSC company, administration and other overheads, company pension contributions etc., will be deductible against corporation tax in the usual way, but assuming that the company profits are extracted by way of a salary, and the company has no other income than that earned from off-payroll working in the public sector, then losses will result for company accounting and corporation tax purposes. The explanatory guides issued by HMRC and the parliament regarding the draft Finance Bill 2017 do not give any light on how the questions regarding treatment of these losses will be resolved.

It will be advisable for workers, operating through their own intermediary PSC, to review their options ahead of the commencement of the new regime on 6 April 2017, as to what decisions they might need to take regarding continuation or otherwise of operating through the PSC.

If you would like to speak to our expert team about changes to IR35 and how it may impact you, please don’t hesitate to contact one of our team.

Correct as of time of distribution March 2017

 

 

 

 

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