Following the consultation undertaken over the summer and the announcement made at Autumn Statement 2016, draft legislation has been included in the Finance Bill 2017 setting out 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”.
Current IR35 rules
IR35 is anti-avoidance legislation introduced in 2000 and applies where the services of an individual are provided to a client via an intermediary (most typically the individual’s personal service company) in circumstances where, but for the interposition of the intermediary, the individual would have been an employee (or office-holder) of the end-client.
Under the current rules, responsibility for carrying out this assessment falls on the intermediary and, where the legislation applies, the intermediary is required to operate PAYE and account for income tax and national insurance (employee’s and employer’s) on, broadly speaking, the payments it receives from the client as if such payments were payments of employment income.
Effect of the new public sector rules
Under the new rules, where the client receiving the individual’s services is a public authority, responsibility for determining whether IR35 applies will move from the intermediary to the public authority or, if there are agencies or third parties in the contractual chain between the public authority and the intermediary, to the party closest to the intermediary in that chain. In addition, where the legislation applies, responsibility for operating PAYE and accounting for income tax and national insurance will fall on the public authority (or relevant third party).
As a result of these changes, public authorities will therefore need to have systems in place for checking the status of their off-payroll engagements. HMRC is producing an online digital tool which is intended to help assess whether engagements fall within the scope of IR35 which will be made available early next year.
Where the legislation applies payments will need to be processed through payroll under real time information and therefore consideration will also need to be given to the associated administrative requirements. For example, obtaining relevant information from the individual, such as their national insurance number, P45 from previous employment, date of birth and their personal address.
Definition of ‘public authority’
For the purpose of applying the new rules, the draft legislation uses the definition of “public authority” set out in the Freedom of Information Act 2000 (or equivalent Scottish legislation). This covers:
- government departments;
- educational establishments including universities;
- local authorities; and
- the NHS.
This definition has been selected for convenience since most organisations will have already had to consider whether they fall within the scope of this definition for the purposes of determining their obligations under the Freedom of Information legislation.
Importantly, the definition does not cover private companies who carry out public functions for the state, such as charities working in the public sector.
Provision of information and transfer of liability
To facilitate third parties in undertaking an assessment as to whether the new rules apply (i.e. third parties in the contractual chain between the public authority and the intermediary), the new rules require the public authority to inform the third party it contracts with (whether in the contract or otherwise) whether it considers the IR35 legislation applies. As such, even where the public authority is not primarily liable to operate IR35 it still needs to consider its application.
To the extent this information is not provided, or the third party has questions regarding the reasoning behind the pubic authority’s conclusions, this must be provided within 31 days of receipt of a written request. If the requested information is not provided within the prescribed time frame, the obligation to apply the legislation and operate PAYE will transfer to the public authority.
The new rules also contain further provisions for transferring liability (a) to the individual where the individual (or a person connected to the individual e.g the intermediary) has provided fraudulent information regarding the application of IR35, and (b) to the public authority where the party it is contracting with is not resident in the United Kingdom.
The new rules will impose tax and national insurance obligations only. Entitlement to statutory payments, pensions obligations and employment rights will all be unaffected.
When do the new rules take effect?
The new rules will apply to payments made on or after 6 April 2017. There is no grandfathering provided for in the draft legislation and therefore the new rules will apply to contracts entered into before 6 April 2017 which continue in force after this date (and also payments made after this date in respect of work undertaken prior to this date).
It is therefore important for all public authorities (and agencies who provide workers to public authorities) to review their off-payroll arrangements as a matter of urgency to assess the impact of the new rules and prepare for the resulting changes they will entail.