'Off-payroll' working: government consultation
The government has announced that, with effect from April 2017, it will reform the application of the intermediaries legislation in the public…
In this year's budget the government announced that, with effect from April 2017, it will reform the application of the intermediaries legislation (commonly referred to as IR35) in the public sector in order to make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies. A consultation document has now been issued.
What is IR35?
By way of reminder the IR35 legislation essentially requires individuals, who would, but for the imposition of an intermediary such as a Personal Service Company (PSC), have been regarded as employees of the client to whom their services are provided, to broadly pay the same taxes as if they had been employed directly. However, under the current rules the burden for assessing the position and deducting and accounting for PAYE and NICs generally falls upon the intermediary rather then the client (i.e. the person contracting with the intermediary). Despite this legislation having been in place for 15 years the government believes that there remains significant non-compliance and admits that it does not have the resources to effectively police this area.
The proposed changes
The proposed changes come hot on the heels of a consultation last year about reforming the IR35 rules more generally. One of the proposals put forward was to pass responsibility for assessing whether IR35 applies to the engagers and, if it does, require the engager to deduct tax and NICs under PAYE. It is essentially this proposal which is being rolled out in the public sector.
From April 2017, the responsibility for determining whether or not any workers who provide services to a public sector engager via their own PSC (or other intermediary) fall within IR35 and, if they do, operating the relevant payroll deductions, will therefore fall upon the public sector body, agency or other third party that pays the worker’s company rather than the relevant intermediary.
Who will the changes apply to?
The rules will only apply (at least initially) to the public sector.
It is clear that the government feels that it needs to get its own house in order first, the widespread use of PSCs in Whitehall and other public sector bodies having been a source of some embarrassment over recent years, and that the public sector should be the ‘vanguard’ in ensuring all taxes are properly paid and accounted for.
It is intended to use the definition of “public sector” in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002 for this purpose and the new rules will therefore, amongst others, apply to government departments, the NHS, local authorities, police and fire authorities and educational establishments including universities.
Whilst it is not currently proposed that the new rules will cover private companies who carry out public functions for the state (the examples provided being a private healthcare company running an urgent care centre at an NHS hospital or charities working in the public sector) one of the questions raised in the consultation is whether it should.
The new rules will apply to any and all types of business that supply workers to a public sector client (not just employment agencies/businesses). This is to avoid the rules being circumvented “by restructuring contracts to be about service provision rather than a supply of a worker”. However, the rules will not apply where the workers are employees of the agency or other third party who are supplying them to the public sector body (in which case employment taxes are already been fully paid and accounted for by the agency or other third party). It is therefore only where the worker is engaged by the agency or third party via an intermediary (such as their PSC) that the new rules would apply and need to be considered.
If there is more than one agency in the contractual chain then the legislation will apply to the agency which contracts directly with the PSC. Where that agency is offshore, it is proposed that the liability should fall on the last party in the chain that is UK resident (which could be the public sector engager where there is no other UK resident party in the contractual chain). This is likely to discourage the use of offshore agencies in the public sector.
Whilst these new rules will not initially apply to individuals who are working through PSCs in the private sector, it is almost inevitable that these changes will be rolled out to the private sector in due course.
What will this mean for me?
If you are a public sector body who engage workers via an intermediary (particularly PSCs) you will need to assess whether the new rules apply.
If so, and the responsibility for operating payroll falls upon you as the public sector engager, this will place an increased administrative burden on you as the way in which the tax deductions are calculated is different (as there is a 5% notional allowance or deduction to take account of the general running costs of the PSC) and the personal details of the workers (such as their NI number) will need to be obtained in order to discharge the payroll obligations.
It should be noted that even if brought ‘on payroll’ the charges made by the PSC for the provision of the worker’s personal services will remain subject to VAT and no changes will be made to existing employment law (so the affected workers will not necessarily gain any additional employment rights albeit this may increase the possibility of such arguments about employment-status).
A new ‘simplified’ test?
HMRC acknowledges the increased compliance burden and is proposing a simplified test for determining whether the new rules apply along with an online tool (modelled upon the current employment status indicator) that can be used by engagers and which will provide HMRC’s view on whether the new rules apply to a particular engagement. A statutory appeals process will also be put in place. The natural risk with a simplified test is that it will invariably result in more people being ‘caught’ and found to be within the rules than might otherwise have applied under the existing IR35 legislation.
‘New’ contracts only?
One key question that has not yet been answered is whether the new rules will only apply to new contracts entered into (or renewed) after April 2017. It is hoped that this will be the case as if not then this will further complicate matters and mean existing contracts (taking into account the additional employers NICs) may become ‘loss making”.
What do you think?
Comments are invited on the consultation before 18 August 2016. If you are, or may be, affected by the changes we would encourage you to review the proposals in the consultation document and put forward any concerns you may have as to their proposed operation and impact.
Haydn Rogan (firstname.lastname@example.org) is a tax Partner in the Corporate Team and is based in Manchester. If you have any questions about how the IR35 consultation will affect your organisation please get in touch with Haydn or speak to your usual Weightmans contact.