In light of the Government’s commitment to reducing the tax gap arising from off-payroll working arrangements, there are new rules for off payroll working in the public sector.
According to the Treasury’s 2017 Spring Budget Policy Paper, it is expected that the changes will generate around £185 million per annum in additional tax.
From 6 April 2017, changes to the intermediaries legislation (IR35) rules mean public sector bodies are responsible for collecting tax and national insurance contributions (NIC) from payments to their contractors who work through an intermediary (in most cases, a worker’s own limited company or personal service company). The reforms essentially determine whether contractors are behaving like employees and should therefore be taxed at source, for both income tax and NIC, exactly as if they were an employee. Up to now, the onus has been on contractors to self-determine how they should be taxed and if they got it wrong, their limited company was liable for the unpaid tax bill.
The rules only apply to public sector bodies, being any entity covered by the requirements of the Freedom of Information Act 2000 and Freedom of Information (Scotland) Act 2002, including government departments, NHS, Universities and local authorities. There are currently no plans for these rules to be extended to the private sector. The new rules apply to any payment made on or after 6 April 2017, regardless of whether work was carried out before this date.
The New Responsibilities
The changes do not introduce any new responsibilities as such, but instead create a shift in responsibility to increase compliance. In summary:
a) public sector bodies will need to assess the roles being undertaken by the contractor and conclude whether they are akin to “employment”;
(b) if a role has been considered as “employment”, the public body (or the end-client) will calculate and deduct the appropriate income tax and NIC before making payment to the personal service company; and
(c) if a role has been considered as “employment” the public body (or the end-client) will report to HMRC, through Real Time Information, the employment taxes deducted.
What Does This Mean?
The implementation of the IR35 reforms have been rather hasty and have not left organisations a great deal of time to finalise any plans. It is likely there will be apprehensions within HR departments as to how they will determine whether the rules do apply. While it will be the responsibility of HR departments to determine whether contractors are genuinely self-employed, they will have the assistance of the government’s HMRC’s Employment Status Service (ESS) digital tool. Along with this shift in responsibility, there will be an undoubtable additional administrative burden attached, as a paper trail in considering the contractors IR3 status should be kept.
In light of these changes, HR departments should ensure they have the necessary measures to properly assess contractors – a blanket decision for all will not suffice. Consideration should also be given to any existing contracts where payment is expected on or after the 6 April. The changes are very complex and it will be difficult to tell whether the engagement falls within the IR35 rules. It may be worthwhile for HR departments to take a risk free approach by deducting tax from all payments made to such intermediaries if there is an element of doubt, as there could be a hefty price to pay if HMRC successfully challenge any decision made, as public sector bodies will now be responsible for footing the tax bill!
If you are a public sector body or a contractor and have questions about the changes to the IR35 rules, or any other employment law issue, please contact Noele McClelland in Thorntons specialist Employment Law team on 03330 430350 or email nmcclelland@thorntons-law.co.uk.
