New guidance published for off-payroll working in the public sector
As mentioned in our Looking Ahead to 2017 briefing April 2017 sees the implementation of many significant changes including the gender pay reporting requirements, the apprenticeship levy and off-payroll working in the public sector.
We have written extensively about the gender pay reporting requirements and apprenticeship levy. In this briefing we focus on the changes to the off-payroll working rules and the implications for public authorities, the intermediaries that provide the workers to provide the services and the workers themselves.
Comprehensive guidance has recently been published by the government and HMRC as well as draft Regulations for consultation.
What is the background to the changes?
The off-payroll rules are better known as IR35 or the intermediaries' legislation. There has been long-standing concern that individuals who work through an intermediary, such as a Personal Service Company (PSC), do not fully comply with the IR35 legislation and so are able to avoid employment taxes or NICs when, but for the PSC, the arrangements between the parties are more characteristic of an employment relationship.
The government’s purpose in bringing about these changes is to improve fairness in the tax system by removing the ability of the individual to side-step the IR35 rules. It is reported that the changes will generate additional tax and NICs of around £25 million a year. This seems a relatively small sum however when, according to HMRC, for the tax year 2016/17 non-compliance with IR35 will cost £440 million. Whatever additional revenue is raised it will be welcomed by the government because alongside the concerns about IR35, the growth of the gig economy is also having an impact on government finances. According to the government's Taylor review of employment practices (which concludes in May 2017) there is evidence that businesses are using self-employment status as a way of avoiding tax. But that's not all. The TUC published a report on 14 February 2017 which states that the growth of low paid self-employment has resulted in the government collecting around £2.1 billion less in income tax and NICs each year.
What are the changes?
The changes relate to the way IR35 is applied to the provision of services to a public authority through an intermediary. An intermediary can be a PSC, partnership or individual. The changes come into effect for the tax year 2017-2018 but it is important to note that they affect payments made from 6 April 2017 even if these payments relate to services provided before 6 April 2017.
With the changes to the rules:
- The burden of compliance with the legislation rests with the public authority to assess the arrangements under which the individual provides their services. The public authority will need to apply the employment status test. If that test shows that the individual would have been an employee of the public authority but for the existence of the intermediary, and the intermediary falls within the description set out in the legislation, the arrangements will be caught by the new rules. The employment status test is the same kind of test based on case law that public bodies and agencies have to consider when they hire staff directly.
- The public authority must notify the intermediary with whom they have a contract to provide the services whether or not the new rules apply.
- If the public authority does not notify the intermediary of the status of the worker then the intermediary may request in writing that the public authority provides the necessary information. The public authority can also be asked by the person they have contracted with to provide reasons supporting the conclusions reached by the public authority.
- The public authority must reply to the written requests for a decision on whether the off-payroll rules are applicable or for the reasons why they reached that conclusion within 31 days of receiving the request. If the public authority does not reply to the request as to whether or not the off-payroll rules apply within 31 days the public authority becomes responsible for accounting for PAYE.
- The fee payer (i.e. the person or company which pays the intermediary through which the services have been provided) must calculate and deduct PAYE and NICs and pay it over to HMRC. That amount is then deducted from the intermediary's fee for the work carried out.
It is crucial to bear in mind that if the employment status test is satisfied and the rest of the requirements of the legislation are fulfilled, the individual is an "employee" of the fee payer for tax purposes only and is not an "employee" within the meaning of the employment legislation. For example, they would not have the right to bring an unfair dismissal claim.
The changes do not apply to intermediaries providing services to the private sector or to agency workers or managed service companies which have arrangements with the public authority. Further, there will be no impact for those who are genuinely self-employed and outside the IR35 rules.
Who is affected?
A public authority is captured by the changes if it falls within the definition of “public authority” set out in the Freedom of Information Act 2000 (FOIA). This includes local authorities, the NHS, universities, government departments and companies owned or controlled by public bodies. It does not include for example, registered providers of social housing as they are not public authorities for the purposes of FOIA.
What guidance is available?
A new Employment Status Service will be provided by HMRC and is intended to assist public authorities to decide whether the new rules apply. The intention is that this tool will be made available prior to 6 April 2017 but it was recently reported that it may be available by the end of the month.
What action should you take now?
There is not a great deal of time until implementation of the changes and we suggest you take the following steps:
- Identify those who provide services through intermediaries and identify if any are affected by the new rules.
- Consider the cost implications if you are affected by the new rules as the fee payer and indeed as the worker and whether this will cause cash flow problems.
- Review the existing contractual arrangements and revise if appropriate.
- Ensure you are familiar with the various elements of the "employment status" test.
- Review your internal payroll processes and administrative processes.
- Consider whether any additional income tax and NICs impact on your potential liability to pay the apprenticeship levy (payable on an annual wage bill of more than £3 million).
- Read the guidance that has been published and don't forget that the HMRC Employment Status Service will be available shortly.
- Seek legal advice if necessary. Simon Court and Cathy Bryant of our Corporate Tax team will be able to help with regard to tax matters, Oliver Weiss of the Employment team with regard to intermediaries and your usual contact in the Employment team will help you with the employment-related queries.