Off-payroll working in the public sector: reform of IR35 legislation
In the Finance Bill 2017, the Government set out new rules to public sector bodies (PSBs) hiring off-payroll workers, all agencies and intermediaries involved in the supply of off-payroll workers and all workers who provide their services to a PSB via a personal service intermediary (PSC). The Government have confirmed that there are currently no plans to extend these rules to the private sector, however they have also not ruled it out.
The Government have reformed the IR35 legislation to reduce the tax gap arising from off-payroll working arrangements and the reforms are expected to generate HM Revenue & Customs additional tax and National Insurance of around £25 million per year.
Who does it impact?
The new rules apply to organisations that are Public Authorities for the purposes of the Freedom of Information Act 2000 and Freedom of Information Act (Scotland) 2002, such as:
- Local Government, NHS, schools, further and higher education institutions and the police;
- Other public bodies e.g. The Tate Gallery, The General Medical Council and the BBC;
- Publicly owned companies e.g. Transport for London.
What is the impact?
From 6 April 2017, PSBs are now responsible for identifying and reviewing the employment status of all workers engaged through PSCs including those provided via an agency.
Where, in the absence of the PSC, the worker would have been regarded as an employee of the public sector authority (under the IR35 rules), the PSB or the agency is required to treat payments made to the PSC as if they were earnings paid to the worker from an employment (if applicable) with the PSB (‘deemed employment payments’).
The PSB or the agency is required to account for PAYE and National Insurance (both employee and employer) to HM Revenue & Customs on the deemed employment payments made to the PSC.
How will you know if you need to deduct tax/NIC from payments to the PSC?
Most organisations should already have a process in place for assessing if individuals can be paid off-payroll by considering the employed vs. self-employed tests established by various tax cases.
The Government intends to introduce a new ‘‘gateway’’ process (digital tool) to enable engagers to quickly determine whether the new rules need to be considered. This is intended to be a simple mechanism, which will quickly eliminate business to business relationships that are not within the scope of the rules.
How will tax and NICs be accounted for?
This is where it starts to get more complicated. The recommended approach is to work out the correct amount of tax and NICs, the engager will need to calculate an amount of deemed employment income (and earnings for NIC). This is the amount of the payment made to the intermediary, less any VAT charged.
The new rules require the PSB, or the agency engaging the worker on their behalf, to obtain the necessary personal, company and tax information to operate Real Time Information (RTI) from the worker’s PSC. The balance is then to be included for RTI purposes and returned to HMRC in the normal way.
The engager should operate all expenses and other allowable deductions and allowances as if this were under direct employment. Responsibility for paying employer NICs on the deemed employment income will also shift from the PSC to the relevant engager.
Exclusions (not exhaustive)
- Workers who are subject to PAYE and NIC as employees of an agency or umbrella company;
- Workers supplied by compliant managed service companies.
Enforcement (on public sector authorities)
Financial sanctions will be applied on PSBs where there is a failure to respond within 31 days to a written request from an agency in relation to a worker’s status under IR35 and the worker is ultimately deemed to be an employee. In this specific situation, the PSB will be responsible for accounting for tax and NIC on payments to the PSC.
Plan of action for PSCs affected
Many workers who are engaged with PSBs via PSCs will, on discovering that the PSB is going to start deducting PAYE and NIC, want to go onto the payroll. However, this will not always be possible so the worker will want to minimise any further tax liabilities.
In respect of PSCs receiving payments from the organisations listed above, the PSC will receive a deduction equal to the net fee, excluding VAT received from the organisation. This would effectively be a non-taxable payment equal to the net fee that does not require further Income Tax and NIC deductions.
These payments would need to be reported to HM Revenue & Customs on the full payment submission (FPS) that payroll software produces.
If the PSC also engages with the private sector, it is important to determine if the new rules are applicable to that work. Where applicable, the PSC would need to calculate a deemed employment payment for those contracts.
If the decision is made to pay yourself a dividend from the PSCs available profits, the director can pay themselves a tax-free dividend equal to the net fee received from public sector engagements, where Income Tax and NIC have been deducted at source.
From a Corporation Tax perspective, when calculating the PSCs income, the total amount of the invoice should be deducted, less Income Tax and NIC deducted at source. This is to ensure that the company accounts reflect no element of double taxation.
If you would like any further clarification on this subject, please contact any member of the tax team.