For many years, the Government has attempted to put a stop to what it has viewed as widespread non-compliance with tax obligations by workers providing their services to clients through the use of intermediaries (often personal service companies or PSCs).
2017 will see a significant change as it will become the responsibility of the public body (rather than the PSC) to determine whether, if the intermediary was out of the picture, the relationship between the worker and the end user would be one of employment. If it would, income tax and NICs will be payable. Where there is deemed employment, the organisation that pays the fee to the PSC (whether that is the public body or an intermediary) will be required to make deductions for income tax and employee’s NIC and to pay these taxes as well as employer’s NIC to HMRC. Employer’s NIC cannot be deducted from the fee invoiced by the PSC so it will be an additional cost to the public body (or the intermediary).
A public body is any entity subject to the Freedom of Information Act 2000 (or the equivalent in Scotland) so includes universities, NHS bodies, government departments, local authorities and all activities covered by those authorities whether or not covered by that Act.
In 2000, the “IR35” rules were introduced to prevent workers avoiding employee income tax and NICs by supplying their services through an intermediary and paying themselves in dividends. IR35 rules (found in the Social Security Contributions (Intermediaries) Regulations 2000 and Chapter 8 of Part 2 Income Tax (Earnings and Pensions) Act 2003) (ITEPA) apply where (in summary):
- The individual personally performs services for a client;
- Services are provided through an intermediary; and
- The circumstances are such that if the arrangements had been made directly between the individual and the client, the individual would have been regarded as employed by the client.
Despite further legislative changes, the Government remained concerned that contractors who should be deemed employees continued to evade tax.
Following a consultation in 2016, draft provisions of the Finance Bill 2017 have been published which will introduce a new chapter 10 of Part 2 ITEPA 2003 and will also amend the IR35 rules in chapter 8 of Part 2 ITEPA 2003.
With effect from 6 April 2017, public bodies must assess whether contractors providing a service to them via a PSC (and possibly another intermediary) are deemed employees.
HMRC have promised (but not yet delivered) an online tool which can be used to determine whether the off-payroll rules apply. HMRC makes clear that its previous guidance on employment status will need to be taken into account. No reference is made in the guidance on off-payroll workers to the complexities in determining status, an issue which courts have tussled with for years. Needless to say, the decision as to whether the worker should be deemed an employee for the purposes of the off-payroll legislation is not likely to be a straightforward one unless, as appears to be indicated by HMRC guidance on off-payroll workers, a fairly broad-brush approach is taken.
If there is deemed employment, the PSC or the intermediary who pays the fee to the PSC must be notified of the decision by the public body and the organisation that pays the fee to the PSC (either the public body or an intermediary such as a consultancy firm or employment agency) will be required to deduct income tax and employee’s NIC before paying the fee to the PSC. In addition to paying the deductions to HMRC, the fee payer will need to pay employer’s NIC (currently 13.8%).
The rules will apply to all payments made on or after 6 April 2017 regardless of the period to which the payment relates.
Given the obligation to pay income tax and employee’s NIC and the fact that employer’s NIC cannot be deducted from the fee invoiced by the PSC, negotiation will no doubt ensue between the PSC, intermediaries and public bodies to determine which organisation will shoulder these additional costs.
Not employment for other purposes
Off-payroll working in the public sector does not create obligations on the public body in relation to the provision of occupational and stakeholder pensions or any other statutory payments such as maternity, sick pay etc. Those obligations remain with the PSC.
- Public bodies and intermediaries should review all potentially affected contractors;
- Public bodies should create processes for the determination of employment status and notification of that status;
- Public bodies/intermediaries should set up systems to make deductions for tax and NIC and payment of employer’s NIC where applicable;
- PSCs, intermediaries and public bodies should consider any changes to fees as a result of tax obligations (this could be, for example, fees invoiced to the intermediary or the public body by the PSC or fees invoiced to the public body by the intermediary. Intermediaries may seek to recover the cost of employer’s NIC from the public body) and any necessary changes to contracts;
- Intermediaries/public bodies (as applicable) should consider requesting the information required by the fee payer about the worker in order to make payments to the PSC (name, date of birth, NI number, tax code, PSC bank account);
- PSCs need to take tax advice to ensure, where possible, avoidance of double taxation as a result of tax and NICs being deducted from its fees before they are paid by the public body/intermediary as well as being deducted before salary payments are made to the worker providing the services.
If these rules are effective in recovering tax for HMRC, we will no doubt see them being rolled out in the private sector.