Just before Christmas, Michal Chudy flagged the introduction of something called "off-payroll working in the public sector" (here), but what is it all about?
Helpfully, HMRC has just issued new guidance on the change:
• Overview on reform of intermediaries legislation: here.
• Public authorities: using a personal service company: here.
• Reform for fee-payers: here.
Although tax tends not to be the jazziest of topics to blog about, for public authorities (and this is a wide definition – see below) it is worth getting your head around what is involved before it comes into effect in April. So here goes...
Intermediaries legislation, also known as IR35, was introduced in 2000 to try to stamp out perceived tax avoidance under which individuals would supply their services through an intermediary (usually a personal service company or PSC) to try to avoid paying employee income tax and national insurance contributions (NICs).
Currently, responsibility for deciding if the legislation applies and for accounting for tax due lies with the intermediary (and so, with PSCs, often with workers themselves). From 6 April 2017, this responsibility shifts to the public authority to which the worker supplies their services.
Who will be caught by the change?
The new provisions apply to "public authorities" as defined under the Freedom of Information Act 2000. The definition is much broader than you might think, meaning a large number of institutions will be caught: as well as Government departments, it includes local authorities, the NHS, maintained schools, higher education institutions and other bodies that appear to be exercising functions of a public nature. The Freedom of Information Act also includes a wide-ranging list of named public bodies to which it (and by extension off-payroll rules) apply, such as a large number of public museums and libraries, advisory committees and various other Councils and commissions.
Put simply, if you are subject to the freedom of information request regime, this change will apply to you. If you would like further guidance on whether you will be affected by the reforms, please get in touch with your usual contact in the Firm.
Determining if the rules apply
As of 6 April, it will be the responsibility of public authorities to determine whether off-payroll rules apply, both at the start of a contract and on a continuing basis as contracts change.
To help with this, HMRC has created an Employment Status Service tool to allow public authorities to obtain HMRC's view on whether a worker falls within the off-payroll rules. HMRC has indicated that this tool should be available by the end of February 2017 and we will let you know as and when it goes live.
Although use of the tool is optional, and we have obviously not seen it yet, it is likely to be in the best interests of public authorities to use it and keep a record of their answers and the conclusion given. Not only is the tool likely to be the simplest way of approaching the duty, it will also help support decisions if they are ever challenged.
Requirement to make deductions
If it is decided off-payroll rules apply, the person who pays the fee to the intermediary for the worker's services (whether it is the public authority itself or an agency – "the fee-payer") is treated as an employer for tax and NICs purposes. Any contractual payments made to the intermediary are deemed payments of employment income and must be made net of income tax and NICs.
The fee-payer must calculate the amounts deemed paid to the worker and the income tax and NICs due and report this to HMRC. This should be done using PAYE real time information (RTI) on or before the date the payment is made to the worker.
The fee-payer should ask the worker for any relevant information it needs to process this, such as their national insurance number, date of birth and, if applicable, P45.
If an agency is the fee-payer
Even if a public authority uses an agency (or some other third party) to pay intermediaries, it remains the public authority's duty to determine if off-payroll rules apply. The public authority must inform the agency whether or not the contract falls within the rules.
When will the change apply?
The reform applies to payments made on or after 6 April 2017. This will include payments made for contracts entered into before that date or where work is completed before 6 April, but the payment is made on or after that date.
Impact on employment rights
In its technical note of December 2016, HMRC is clear that "statutory payments and other employment rights are unaffected by the new legislation". For HMRC purposes, the intermediary continues to be the worker's employer, meaning the fee-payer is not responsible for payments like statutory sick pay, maternity pay or auto-enrolment pension contributions etc. Instead, the intermediary remains the worker's employer for these purposes.
However, notwithstanding HMRC's position on this point, we would encourage public authorities to use this opportunity to consider the employment status of individuals engaged via intermediaries from a wider employment law point of view. Although the tests for employment status used by HMRC differ from those used by the Employment Tribunal, there is still some overlap. Given this, if HMRC's Employment Status Service tool shows that off-payroll rules apply, it could be an indicator that the relationship might need closer attention. For example, even if the individual is not an employee, they might have grounds to argue "worker" status (for more on which, see our recent blog piece).
Steps to take before April 2017
With a little over six weeks to go before the new rules take effect, there are a number of things which public authorities could do to prepare:
• Identify any existing workers engaged via a PSC or intermediary who might be affected.
• Put in place an ongoing system for identifying, assessing and documenting off-payroll worker status.
• Keep an eye out for HMRC's Employment Status Service tool and consider using it to assess any current and future contracts.
• Consider offering training to hiring managers to ensure they are aware of the change and how it may impact them, particularly if recruitment is carried out by departments without HR input.
• Liaise with your payroll department or other agencies to ensure everyone is ready for the change. There is no need to add off-payroll workers to your existing payroll, but you may want to consider whether or not to set up a separate payroll for them.
If you need any further guidance on any of the issues raised in this article, we would be happy to help.