In our briefing of 21 December 2016 we set out details of the changes to be made to the intermediaries legislation (commonly referred to as 'IR35') which will apply where the services of an individual are provided through an intermediary to a 'public authority'. This definition includes education institutions.
The Finance Bill 2017 was published on 20 March 2017 and contains revised legislation which is to apply to off-payroll workers in the public sector with effect from 6 April 2017.
There are some significant amendments to the legislation, in particular in relation to the provisions governing the provision of information by public authorities and the transfer of liability.
Information to be provided by clients and consequences of failure
As originally drafted, the off-payroll legislation imposed an obligation on the public authority to inform the party it contracted with of its conclusion as to whether the worker would be the public authority’s employee (or office holder) for income tax purposes if there was a direct contract between the public authority and the worker. Although there were no consequences imposed on the public authority if it failed to comply with this obligation, the legislation provided the party contracting with the public authority with the right to request this conclusion and, if such a request was made, the public authority had 31 days in which to respond. A failure to respond to such a request would effectively render the public authority responsible for determining whether the legislation applied and, if it did, for applying it.
Under the revised legislation the public authority must now provide the above conclusion to the party it contracts with within a specified time frame, without the need for the contracting party to make a written request. Where the contract to which the public authority is a party is entered into on or after the 6 April 2017, this must be provided (i) on or before the time of entry into the contract or (ii) if the services are performed at a later time, before that later time. Where the contract to which the public authority is a party is entered into before 6 April 2017, the information must be provided on or before the date of the first payment made under the contract on or after 6 April 2017.
Failure to comply with this obligation will again render the public authority responsible for applying the legislation but it will now no longer be possible for the public authority to wait for a written request to be made by its contracting party before being concerned about this “sanction”. Effectively, this means that a public authority will now need to undertake the above analysis in respect of all of its off-payroll engagements which are structured via third parties (such as agencies) and to notify the party it contracts with what the outcome of that analysis is, even if the off-payroll legislation ultimately does not apply (for example, because all of the other qualifying conditions are not satisfied). The only exception to this would be if the worker notifies it that the other qualifying conditions are not satisfied. However, based on the revised draft legislation, that would only be relevant if the public authority was contracting directly with the worker’s personal service company i.e. it would not apply where the public authority is contracting with an agency, who in turn contracts with the worker’s personal service company (see below).
In addition, in a further extension to the legislation, the public authority will also be liable for applying the legislation if it “fails to take reasonable care” in coming to the above conclusion. To mitigate its risk it will therefore be important for the public authority to put in place appropriate safeguards to ensure that any analysis is undertaken on a reasonable basis. This may include use of HMRC’s online employment status tool, provided it is completed fully and accurately.
The obligation on the public authority to respond within 31 days to written requests raised by a contracting party regarding its reasons for reaching the conclusion it has reached has been retained. However, unlike under the original legislation, the revised legislation also transfers responsibility for applying the legislation to the public authority if it fails to comply with this request.
The original deficiency in the drafting, namely the limitation of the obligation imposed on the public authority to only notify it conclusion and to provide its reasons for that conclusion to the party it contracts with, has not been addressed. This means that where there are multiple agencies in a contractual chain, there is no statutory right for the final agency in the chain (which would be responsible for applying the legislation) to receive the public authority’s conclusion and accompanying reasons.
Information to be provided by worker and consequences of failure
An additional provision has been introduced which requires the individual worker to inform the ‘potential deemed employer’ (i.e. effectively the party responsible for applying the legislation and operating PAYE on the payment it makes to the worker’s intermediary) whether the qualifying intermediary conditions in the legislation would be satisfied. For example, in the case of an individual operating via a personal service company the worker will be required to notify the entity responsible for undertaking the assessment as to whether the legislation applies whether the worker has a material interest in that personal service company and whether the personal service company is an associated company of the public authority.
If the worker does not provide the information then one of the relevant intermediary conditions will be deemed to be satisfied. This incentivises individuals who consider they don’t satisfy the relevant conditions to confirm this to the entity undertaking the assessment as to whether the legislation applies (so that PAYE deductions are not made from payments under the arrangements).
As the obligation is for the worker to only inform the ‘potential deemed employer’ this means that there is no obligation to inform the public authority where the public authority is contracting with an agency, which is then contracting with the individual’s personal service company (as in this situation it would be the agency, rather than the public authority, who would be the ‘potential deemed employer’). As such, this obligation will not help public authorities to manage the analysis they need to undertake above where they are contracting with agencies, rather than directly with an individual’s personal service company.
In addition to the above, a number of further amendments have also been made to the legislation. These include:
- amendments to the calculation of the ‘deemed direct payment’ (i.e. the payment to which PAYE obligations will apply), including:
- making it optional to make deductions in respect of expenses met by the individual’s personal service company;
- restricting any deduction for materials used to those costs which represent a direct cost to the intermediary (as opposed to any person);
- adjusting the amount of the ‘deemed direct payment’ where the amount actually paid has been adjusted so that the recipient of it bears the cost of amounts due under PAYE and/or employee national insurance;