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Markel Tax

12 Dec 2016

Off payroll working in the Public Sector

The autumn statement confirmed that the new rules on off payroll working in the private sector will come into force from 6 April 2017.  To achieve this Finance Act 2017 will insert a new Chapter 10 into the existing intermediaries (IR35) legislation.  The draft legislation (Finance Bill 2017) was released on 5 December 2016.  Although some changes may be made as the Finance Bill passes through Parliament it seems reasonable to expect that the final version will look very substantially like the draft.

Accompanying the draft legislation is a large set of guidance notes which give a useful summary and some insight into how HMRC expect the rules to operate.

What do we know so far

Under the draft legislation responsibility for deciding if the off-payroll rules apply move from the personal service company to the public authority.  In most cases the party responsible for calculating the deemed payment and operating tax and NIC will be the one paying the fee to the intermediary.  They will also be liable for the costs of the Employer’s NIC.

This new rules apply to any payments on or after 6 April 2017 and also to payments made on or after that date under contracts entered into before 6 April 2017.  HMRC have stated that the existing employment status tests will still be applied to the arrangements.  As with the “normal” IR35 rules where apart from the existence of the intermediary the engagement is shown to be an employment the new rules will apply and tax and NIC will have to be deducted  HMRC is to introduce a new Employment Status checker for use in deciding whether the rules apply.  The information we have seen on this suggests that it will not be any more useful than the version which was scrapped last year.

The Details

The draft legislation creates new sections 61K to 61V ITEPA 2003 and can be found in Schedule 1 of Finance Bill 2017.  It shows that the new rules will not supersede the current rules governing self-employed workers provided via an agency (s44 ITEPA 2003), the managed service company legislation or the special rules on visiting performers (s966 ITA2007).

An intermediary is defined as:
  • your own limited company
  • a service or personal service company
  • a partnership
  • an individual
 And a public authority means a public authority for the purposes of:
  • the Freedom of Information Act 2000
  • the Freedom of Information (Scotland) Act 2002
The guidance notes state that:

“This definition covers government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service. The Acts cover England, Scotland Wales and Northern Ireland. Some cross-border public bodies in Northern Ireland are outside the Freedom of Information Act 2000.”

Once the public sector body has decided on the IR35 status of the arrangements it must inform the party they have a contract with whether it falls within the new off-payroll rules or not.  If they don’t  the relevant party may request the information and the reasons for reaching their conclusion.  The public sector body must reply to the written requests within 31 days. If they don’t do this they become responsible for accounting for PAYE.

There is no clear mechanism within the legislation on how to appeal against the decision,  In practical terms there doesn’t appear to be any actual scope for any appeal as the body making the decision isn’t party to Tribunal rules.

There is a detailed explanation of how the deemed payment will be calculated if the rules apply and the person liable to deduct the tax and NIC arising is defined as the “fee payer”   This is defined along with the payment chain in s61N as:
“…….the chain of two or more persons where—
(a) the highest person in the chain is the client,
(b) the lowest person in the chain is the intermediary, and
(c) each person in the chain above the lowest makes a chain payment to the person immediately below them in the chain.
 “the fee-payer” means the person in the chain immediately above the lowest.”

The Client being the public sector body.

Perhaps the most important aspect of the legislation is where the circumstances which trigger the new rules are described.  This is where:

(a) an individual (“the worker”) personally performs, or is under an obligation personally to perform, services for another person (“the client”),
(b) the client is a public authority,
(c) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party (“the intermediary”), and
(d) the circumstances are such that—
(i) if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office under the client,
(ii) the worker is an office-holder who holds that office under the client and the services relate to the office.”

There are anti-avoidance provisions to deal with situations where the agency or third party that would be the liable fee payer is offshore. In such a situation the liability moves to the next person in the contractual chain who is in the UK or if there is no such party to the public sector body.  There are transfer of debt rules covering the provision of fraudulent documents similar to those within the Agency Worker rules of s44 ITEPA 2003.

Where the new rules apply, the fee payer must operate PAYE and NICs. 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.  The amount treated as earnings is the VAT exclusive amount paid to the worker’s intermediary.  On or before the fee payer making payment to the intermediary, they have to complete the normal RTI process and notify HMRC of the amount of the taxable earnings and the tax, NICs and Employment Allowance through the RTI process.  One important difference to the normal deemed payment calculation is that the 5% deduction currently allowed “notional expenses” will not be available in the public sector.  The calculation is detailed at section 61Q.

What will be the impact of the new legislation

Only time will tell the entire story but seems a reasonable bet that public sector bodies will seek the path of least resistance.  They will use the HMRC status checking tool and not apply any real judgment.  Individuals currently providing services to the sector through IR35 intermediaries will seek new ways of engaging with public sector bodies.  While there are options for those in highly skilled roles who will not be subject to supervision, direction or control for many there is no simple solution.  In the longer term it seems likely that all this will do is increase the costs to the public sector of using a flexible work force as rates will rise to offset the impact on take home pay of the additional NIC (both employee and employer’s).  So in some respects we will all pay the price as we all fund the public sector.
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