Tax analysis: Adam Craggs, Partner at RPC, and Michelle Sloane, Senior Associate at the firm, explain the reformed off-payroll rules for public sector engagements under the Finance Bill 2017.
This article was first published on Lexis®PSL Tax on 12 December 2016.
Government publishes draft Finance Bill 2017 legislation, LNB News 05/12/2016 73
The government published draft tax legislation on 5 December 2016 for inclusion in Finance Bill 2017. Consultation on the draft legislation will run until 1 February 2017.
What is the background to this draft legislation?
At Summer Budget 2015, the government announced it intended to reform the off-payroll rules (often known as IR35 or the ‘intermediaries legislation’) due to perceived widespread non-compliance. The intermediaries legislation was introduced to make sure that people who undertake the same job in the same manner pay broadly the same amount of income tax and National Insurance contribution (NIC), whether they are employed directly, or they work through an intermediary, such as their own Personal Services Company (PSC). HMRC published a discussion document in July 2015, which set out a framework for discussions including the rationale and options for reform.
After consideration of the issues raised in the discussion, the government announced at Budget 2016 that from April 2017 the intermediaries legislation would be reformed in that where the public sector engages an off-payroll worker through their own PSC, that body (or the recruiting agency if the public sector engages through one) will become responsible for:
determining whether the off-payroll rules should apply, and
deducting tax and NIC from any payments made to the PSC
HMRC then consulted on the detail of this reform and the development of a new online employment status tool between 26 May and 18 August 2016.
At Autumn Statement 2016, it was confirmed that the reform of the intermediaries legislation at chapter 8 of Part 2 of Income Taxes (Earnings in Pensions) Act 2003 (ITEPA 2003) will be reformed. On 5 December 2016, the government published draft legislation for Finance Bill 2017 that introduces a new chapter 10 of Part 2 of ITEPA 2003.
Subject to Parliamentary approval and Royal Assent, the legislation introduces off-payroll working to the public sector applying to payments made on, or after, 6 April 2017. The measure will have effect for contracts entered into, or payments made, on or after 6 April 2017.
The government’s stated objective of the reforms is to improve fairness in the tax system by ensuring that individuals are not able to avoid employment taxes or NICs by working through PSCs.
How does this draft differ from the proposals consulted on earlier this year?
Contrary to what the original consultation indicated, the draft legislation states that public sector clients will be responsible for checking IR35 status, even when an agency is involved in the hiring process. The public sector body must inform the intermediary, agency, or third party with whom they have a contract to provide the services, that the contract falls within the new off-payroll rules, or that it does not, as the case may be. If the public sector client does not notify the intermediary, agency, or other third party of the status of the worker then they can request the public sector body provide the relevant information and it must then respond within 31 days of the request. Public authorities need to ensure they have a clear process in place to comply with such an information request. The government's technical note guidance is contradictory on this issue. At paragraph six it refers to the reforms moving the IR35 status decision to the public authority, agency or third party paying the intermediary, however, at paragraph 33 it refers to the public sector client making the decision on whether the off-payroll rules apply.
If the off-payroll rules do apply, the person paying the fee to the intermediary for the workers services is treated as an employer for tax and NIC purposes. If the public authority contracts direct with the intermediary, they are liable to pay the tax, however, if an agency is used, the agency is responsible.
The intermediaries legislation allows a 5% deduction for notional expenses. This is intended to allow for the general expenses of running a business, such as the cost of training and seeking contracts. During the consultation, the government explored how keeping this allowance would work in practice due to the increased administration. Retaining this allowance would effectively give public sector engagers a 5% deduction on the amount on which they will be required to pay employers NIC as the 5% is deducted from gross pay before tax and employers NIC. As a result of feedback received during the consultation, the 5% tax-free allowance for general business expenses, available to workers currently applying the rules, will be withdrawn for PSCs working in the public sector. This will simplify administration and reflects the fact that PSCs no longer have responsibility for applying the rules.
How will HMRC assist engagers with grappling with these new rules?
HMRC are developing a new online Employment Status Service tool that asks a variety of questions in order to determine whether the off-payroll rules should apply. HMRC has indicated that it will be bound by the result of the tool if accurate information is entered by the engager and circumstances do not change. If circumstances change, the tool will need to be re-engaged by entering new responses to the questions raised. The tool will provide a record which engagers will be able to file.
A major concern for those affected by the new measures is that the online tool has not been released yet and will not be until at least April 2017. HMRC’s summary of consultation responses notes ‘the tool will be based on case law’ and will be able to provide ‘simplicity and certainty from day one of the contract’. There is a concern that the accuracy of these comments cannot be tested or any issues resolved prior to implementation. The public sector will already be engaging in contracts that will end beyond the implementation of the reforms in April 2017 and HMRC has not suggested an alternative means of testing.
HMRC has also issued technical guidance with the draft legislation together with worked practical examples to assist those affected by the new measures. In addition, HMRC has indicated that it will continue to work with interested parties to ensure they are ready to implement the changes in advance of the reforms taking effect.
How will public sector bodies need to adjust the processes given this legislation?
This measure is a major change in approach and all public sector organisations will need to ensure that they are fully prepared for the introduction of the new rules in April 2017.
Public sector organisations will now have to consider whether the intermediaries legislation applies to their workers. Affected public sector bodies will need to identify PSC engagements (including existing engagements) and, once identified, consider whether the off-payroll rules apply. If the rules do apply, the public body (or the recruiting agency if the public body engages through one) will need to account for tax and NIC on the payments to the PSC. Public sector bodies should also set up a system for regular (quarterly or biannual) reviews to check the arrangements where findings are that the off-payroll rules do not apply, to ensure continued compliance. An effective system will also need to be implemented to ensure that human resources/procurement and payroll sections share all relevant information.
Affected bodies should also conduct a workforce review to understand the cost implications of the way they are operating, and consideration will need to be given to contractual arrangements in terms of future use of PSCs.
Is this likely to be the final form of the legislation and, if so, what should practitioners and those affected by the changes do in advance of the implementation in April 2017?
It is anticipated that the substance of the legislation will not change. As set out above, those affected by the changes need to ensure they understand the rules and that they have effective systems in place to implement any necessary changes in advance of implementation in April 2017.
Are there any useful learning points from the examples set out in HMRC’s guidance/technical note?
HMRC’s guidance and the examples in HMRC’s technical note provides useful practical guidance on how both the public sector body, agencies and PSCs need to operate to ensure compliance with the reforms, including how to calculate the direct payment on which tax and NICs are paid.
HMRC has made clear that off-payroll working in the public sector does not create statutory payments, such as Statutory Sick Pay and Statutory Maternity Pay. Further, it does not create any new pension obligations on the public sector, agency, or third party to operate occupational or Stakeholder Pensions. The PSCs will also continue to be responsible for VAT as they are at present.
If the online Employment Status tool confirms that the off-payroll rules apply, human resource departments need to ensure that they obtain necessary information in order to pay the PSC through their payroll systems and need to pass this information on to their finance and payroll teams. At the end of the contract, the public sector bodies need to issue the worker with a P45 as they would for a directly employed person.
Interviewed by Alex Heshmaty.