LATEST INFORMATION BASED ON THE “SUMMARY OF RESPONSES” AND “TECHNICAL NOTES” PUBLICATIONS (PUBLISHED 5TH DECEMBER 2016)
General summary of changes due in April 2017
The off-payroll rules (often referred to as IR35 or the intermediaries legislation), are designed to ensure that individuals who work through their own company (PSC) pay employment taxes in a similar way to employees if the nature of the work that they perform would mean that they’d be an employee of the end-user if they were not working via their own PSC. These rules uphold the established principle in UK tax law that tax liability should be determined by the actual working practices themselves rather than the structure through which payment for the work is made.
The new rules being introduced for off-payroll workers in the public sector move responsibility for deciding if the off-payroll rules apply. The shift in responsibility is from an individual worker’s PSC to the public sector body that ultimately uses their services.
Once the public sector body has made a decision and determined that the off-payroll rules apply, it is then the responsibility of the entity paying the PSC to deduct employment taxes before paying the PSC. In instances where the public sector body determines that the off-payroll rules do not apply, the PSC can (continue to) receive gross payments. In instances where the public sector engager does not determine whether the off-payroll rules apply within an appropriate timeframe (31 days), it will become liable for the employment tax deductions in all scenarios, even where it is not the entity that ultimately pays the PSC.
The 5% expenses allowance currently available to PSC’s will be removed for those PSC’s working in the public sector in recognition of the fact that it will no-longer be the PSC itself that carries the responsibility of determining its own IR35 status, and its administrative costs are therefore reduced.
HMRC will introduce a new digital tool to help public sector engagers determine whether engagements fall within the off payroll rules.
What constitutes the public sector?
The government has confirmed that it will push forward with the proposal announced in the consultation document that the definition for what constitutes the public sector will be that set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002. This definition covers organisations such as:
- government departments, executive agencies and non-departmental public bodies
- police and fire departments
- local authorities
- devolved administrations
- educational establishments (including universities)
- BBC & Channel 4
- Bank of England
Adequate sharing of information
The initial consultation proposed that the responsibility for assessing whether the off-payroll rules applied would sit with the entity that pays the PSC, as would the responsibility for carrying out “deemed salary deductions” in those instances when it did apply. Responses to the consultation highlighted that many respondents felt that it would be problematic ensuring that there was an adequate flow of information down from the public sector client to the agency that pays the PSC, and that without that flow of information it would be difficult for the agency to carry out a proper assessment.
As a response to these concerns, the government have confirmed that public sector clients will be responsible for determining whether the off-payroll rules should apply; so it will be the public sector body that carries out the off-payroll assessment, not the agency itself. Agencies will have responsibility for carrying out “deemed salary deductions” based upon instruction from the public sector body, rather than responsibility for both the assessment and the “deemed salary deductions”.
The assessment process
The initial consultation document outlined a 3-stage assessment process; stage 1 was designed to determine whether a PSC was in-scope of the rules, stage 2 was designed to determine whether the off-payroll rules applied in instances where stage 1 had determined that the PSC was in-scope of the rules, and stage 3 (the digital tool) was to be used as a last resort in those instances where the IR35 status was not already clear based on the outcome of stage 2.
The government has decided to abandon this 3-stage process since it believes that most cases would end up not being adequately determined until the 3rd stage anyway. As a result, therefore, the assessment process will now rely entirely on the digital tool.
Given that it will be the responsibility of the public sector body to determine whether the off-payroll rules apply, it would seem logical to assume that they will be the primary users of the tool rather than the recruitment agency.
The government claims that the tool will provide “simplicity and certainty” from day one of the contract but does suggest that additional support will be available in those very small percentage of cases where the tool cannot itself provide a definitive answer.
The government has confirmed that there will be a debt transfer model tagged to the legislation in order to police it. In the event of taxation not being applied correctly, the liability will sit with the entity that pays the PSC unless the failure to apply taxation correctly was caused by another party in the chain issuing fraudulent information about the working practices. In this scenario the liability shifts to the author of the fraudulent information. The tax liability can therefore move up the chain from the agency to the public sector body, or down the contractual chain to the PSC.
Additional points to consider
Apprenticeship Levy – It has been confirmed that when a PSC is in receipt of a payment that has undergone a “deemed salary deduction”, that the entity making the deduction will be seen as the employer of the PSC for the purposes of the Apprenticeship Levy. This means that agencies making “deemed salary deductions” to PSC’s will be in-scope of the Apprenticeship Levy and will therefore have a new tax applied to their business if their annual pay-bill exceeds £3 million.
Construction Industry Scheme (CIS) – The new off-payroll rules take priority over CIS. This means that agencies will not be able to pay the PSC under CIS deduction if the off-payroll rules apply.
Umbrella Companies – Bona fide umbrella companies which employ workers and process their pay as employment income are out of scope of the off-payroll rules since the income is already being taxed on an employed basis.
Statutory entitlements for PSC workers – In instances where the off-payroll rules apply, the entity paying the PSC under “deemed salary deduction” is considered the employer for the purposes of:
- Income Tax
- National Insurance Contributions
- Employment Allowance
- Apprenticeship Levy
However, the entity paying the PSC under “deemed salary deduction” is not considered the employer for the purposes of other statutory payments such as:
- Statutory Sick Pay
- Statutory Maternity Pay
- Statutory Paternity Pay
- Statutory Adoption Pay
- Statutory redundancy pay
- National Minimum Wage
- Pensions auto-enrolment
- Pension contributions tax and NICs relief
- Paid annual leave
- Protection from unlawful deduction from wages
SUMMARY / OVERVIEW
Public Sector Client
Help for agencies
As is now becoming increasingly apparent, these changes to IR35 for off-payroll workers in the public sector will come at a substantial cost to recruitment agencies. Agencies will not only have to shoulder responsibility for carrying out “deemed salary deductions” when instructed to do so by public sector clients, but in carrying out this responsibility the recruitment agencies will also fall within scope of a new form of taxation; they’ll be liable for the Apprenticeship Levy should their pay-bill be larger than £3 million per year. When we consider that a £3 million plus annual pay-bill could be generated by carrying out “deemed salary deductions” on just 24 PSC’s working on a day rate of £500, it becomes very clear that the £3 million threshold is one that a large number of agencies will surpass with surprising ease.
However, there is an alternative option. Liberty Bishop’s new labour engagement model has been specifically designed to alleviate agencies of the responsibility for carrying out “deemed salary deductions” and the associated exposure to the Apprenticeship Levy. Through a relatively minor restructuring of the way in which you engage with PSC’s, Liberty Bishop are able to take ownership of these responsibilities and allow you to continue to remit funds on a gross basis. If you would like to find out more about our new labour engagement model, please contact TeamLB.