HMRC consults on changes to ‘off-payroll’ in public sector
Following the announcement in this year’s Budget that the rules for ‘off-payroll’ workers in the public sector would be tightened up as from April 2017, HMRC have now released the anticipated consultation document, ‘Off-payroll working in the public sector: reform of the intermediaries legislation’
Off – payroll working in the public sector: reform of the intermediaries legislation
The consultation is concerned with reforming the IR35 legislation to improve its effectiveness in the public sector and seeks views on HMRC’s proposals, in particular:
- The scope of the reform
- How the new rules will work
- Ways to minimise burdens on engagers who are affected
The proposals
From April 2017, where a PSC is engaged by a public sector body then it will be the responsibility of either that public sector organisation, agency or other third party paying the PSC to assess and apply the IR35 rules and also to deduct and pay over to HMRC the necessary income tax and NIC. Where there are a number of agencies in the contractual chain then responsibility will rest with the agency that contracts directly with the PSC.
In situations where the agency or third party contracting with the PSC is non-UK resident then the liability will fall on the last party in the chain which is resident here. This will either be another agency or the public sector body itself.
Where the rules have not been applied correctly and foul play has been discovered then the liability can be transferred to the PSC and even the director of the PSC, where the worker fraudulently provides the agency or public sector engager with false information.
In calculating the tax and NIC (employees and employers), the engager or agency will disregard VAT charged on fees by the PSC but there is a question mark as to whether or not the flat 5% deduction that is permitted in calculating the deemed payment should be factored in. The allowance is intended to allow for general expenses of running a business, e.g costs of training and seeking out contracts etc. HMRC clearly don’t think the allowance should be permitted as a deduction from gross pay as it would reduce the tax and NIC take. Furthermore, they argue that it may make the process of accounting for tax more complicated for engagers and for the PSC when it has to account for other taxes such as VAT and Corporation Tax. However, respondents to the consultation document are invited to voice their opinions about this issue.
Simplified process and online tool
To make it easier and more straightforward for an agency or public sector body to decide whether the IR35 rules apply to a contract, HMRC has developed a new simplified process using the current employment status rules and supported by an online tool.
Thankfully, HMRC are not imposing their much favoured supervision, direction or control (SDC) test but it appears that control and personal service will be the deciding factors.
In the first instance the engager will use a new gateway process which will indicate if the rules need to be considered. At this stage, the only factor that will not require the engager to consider the IR35 rules is where 20% or more of the contract is for materials consumed in the service. This is an unlikely scenario for the vast majority of contractors.
Having established that a contract is within the scope of the rules then the engager simply has to answer two questions to decide if IR35 applies:
- Is the worker required to do the work themselves?
- Does the engager decide or have the right to decide how the work should be done?
If the answer to both these questions is ‘yes’ then IR35 applies and the engager will have to account for the tax and NIC on their payments to the PSC. If, however, the engager is unable to answer ‘yes’ to both questions then they will move on and use the digital tool.
The new digital tool appears to be a version of the current Employment Status Indicator (ESI) but tailored to the specific needs of engagers in determining if the off-payroll rules apply. Also, when circumstances change, e.g if the contract is extended or working practices change, then it will be necessary to reuse the tool entering the new facts of the engagement.
When the new tool is in use, HMRC will be bound by the outcome of the test, provided the information entered is accurate and circumstances do not change.
Interestingly, the tool will also be available for those working in the private sector on a voluntary basis and this may well be a signal as to where HMRC are heading with IR35 in the future. If the tool is successful for assessing public sector engagements then do not be surprised if HMRC roll it out universally.
The ESI tool has worked successfully for the construction industry for many years now and there is no reason why it could not work as equally effectively for the freelance sector. This, however, is on the basis that the online tool is developed properly and fairly, with sufficient weight attributed to the relevant status questions. It has the potential to be quick, less complicated and provide a high degree of certainty to contractors from the outset of an engagement.
The government have invited comments regarding the two parts of the test and as to how the online tool can be designed to be simple and straightforward to use.
Respondents to last summer’s IR35 consultation document expressed concerns that engagers would take an overly cautious approach to minimise risk if they were required to take a role in ensuring that the IR35 rules are applied correctly. Far from addressing this concern HMRC are, in proposing two simple questions in the first part of the test, leading the engager to answer ‘yes’ and therefore placing the contract inside of IR35 within the blink of an eye. HMRC must not be permitted to induce agencies, as they will be the one’s predominantly affected, into sleepwalking directly into IR35.
Why the need for change?
The original ‘off-payroll’ rules were introduced only four years ago and then amended in April 2015.
HMRC justify the imposition of these new rules on the grounds that there is evidence of widespread non-compliance with the legislation and that where a contractor provides services to a public sector body and is doing a job in a similar manner to an employee then a similar amount of tax and NIC should be paid. More likely an explanation is that the public sector cannot grasp the existing rules and has made a complete hash of applying them.
Definition of the public sector
A public sector body will be those organisations set out in the Freedom of Information Act 2000 and Freedom of Information (Scotland) Act 2002 and will cover:
- Government departments, executive agencies and non-departmental public bodies
- NHS
- Police and fire authorities
- Local authorities
- Devolved administrations
- Educational establishments including universities
- BBC, Channel 4
- Bank of England
Private companies who carry out public functions for the state, such as a private healthcare company running an urgent care centre at an NHS hospital or charities working in the public sector, will not fall within the definition.
Appeals
Thankfully, there will be a statutory right of appeal against a tax and NIC liability. Where a PSC or an engager disagree with a determination that the new rules apply, either party will be able to request a formal review of the decision and to appeal that decision to the Tax Tribunal.
The consultation runs for 12 weeks and closing date for comments is 18th August.
At present, the answer to the first two questions would be ‘no’ to any current IR35 compliant contract.
Are we envisaging that agencies will now change all their contracts so that the answer to these questions is ‘yes’.
So if you feel that a contract may not pass the test, could not a PSC just spin up a separate company that contracts the PSC, and then this new company is then contracted by the agency or public sector client? The new company could easily draw up a contract that allows the PSC to have full control, and since they would now be “last in the chain” it would be this new company supplying details to HMRC, not the agency. Although I suspect there’s probably a clause in the regulations about the “last in the chain” not counting if it only supplies a single contractor from a PSC… 🙂
I agree with Graham that the current position is that most sensible contracts should pass.
Perhpas the danger is that they *should* pass.
Once the decision is with end clients they may get cold feet, we know they like certainty, even expensive cxertainty.
That said, they probably won;t swallow a 14% increase in costs lightly – there’s a fair chance that they will try to pass it on in the form of reduced rates.
I’m not sure how that will go – if contractors are responding to agents with “£X if inside, £0.86X if outside” then they have a stark choice to make.
Of course agents will push back with “I can only enter one amount into their portal” or some similar get-out…
Not easy. And this shows that HMRC are determined to collect tax here, irrespective of the facts – if people have changed their ways of working then why should they change the law to collect more tax? It stinks tbh.
Contractors acting together could actually make the difference in who wins the next election. If they were to migrate en masse from the Tories to a single party…
Does this mean that if the IR35 rules apply then the worker has access to all the trappings of employment ie holiday pay, pension rights from the engager and also the government provided social support eg work seekers allowance, housing support etc?
If not then why not?
Zealots believe there is just 1 colour (eg white) – because the zealot is always right.
Computer programs are written to usually provide 2 outcomes (eg black OR white).
Well adjusted people believe there is black, white, grey AND other colours of a limited and defined palette.
Scientists believe that there are at least innumerable and possibly infinite colours and possibly something else that is not yet understood.
So why do we persist in arguing over IR35. The answer is simple. If the client wants a worker then choose either (1) an employee and the employee trappings are provided or (2) engage a company and simply pay a fee.
The worker can also choose either (1) be an employee and accept the salary and employee trappings or (2) provide a service and reject the employee trappings and government support.
If the relationship between the engager and the worker is employee then PAYE is paid (to finance the government benefits). If the relationship is provision of services then corporate tax rules apply, which are the same for all companies.
The main question to ask of the worker is: does the worker want to be an employee of the engager or not? Simple!
I would have thought that the mere fact that an engager has entered into a contract for services with a limited company and a worker has set up a limited company and signed a contract for services answers that question quite emphatically.
what is the point in being a contractor.. I make a really bad employee, I don’t fit the mould. I’m retraining away from the industry.. plumber / electrican now makes more than me and without all the fuss and out of hours / living away from home.
My mortgage is paid off, I have investments.. Time to retire and take my knowledge with me.
“Thankfully, HMRC are not imposing their much favoured supervision, direction or control (SDC) test”
Why “thankfully”? Isn’t SDC one of the only easy to understand and reasonably logical test that HMRC have come up with – I could well be missing something here but I’d be very happy if we got to the position where SDC was the primary determinant.
The usual nonsense (sigh) .
Disguised employee = disguised EMPLOYER.
Complex rubbish all to avoid the govt and taxman admitting they advocate the tax/rights avoidance that Big Business exploit from using contractors, yet are only too eager to beat up the “little man” to get that tax.
Contractors should get at least 12 months hassle-free at a client.
Beyond that, the question of whether disguised employment exists can genuinely be asked.
The problem is the government has already decided that all contractors should be paid as employees, and are completely ignoring all other concerns. Their only goal is to try and find a method that achieves the maximum return for them without an unacceptable level of political fall out. It is not fair taxation, and it is certainly not for the good of the people. The consultation process appears to be merely a fig leaf with all of the concerns dismissed for some “reason” or another. A nice example is: “protecting the Exchequer and levelling the playing field between workers engaged in different ways”. The point they are missing is that the playing field is not MEANT to be level. True employees take on no real risk other than redundancy whereas contractors take on a much higher level of risk and only for short term gain. In a properly working economy, greater risk should equate to greater reward (or loss!) without interference from the government.
Unfortunately there appears very little we can actually do about this impending legislation because we are a distributed group of small operators. It’s not like we can form a trade union against HMRC! One thing for certain – I will not vote Tory again for a long time, and I have voted for them my entire life. They appear to have forgotten a segment of the very demographic that puts them in power.
Seems a simple solution to me, HMG are shedding crown servent jobs as fast as is seemly, For example the floorplate i operate under has around 80 people of which
Or rather than arbitrary cut off dates and topics upon which ignorant bureaucrats and judges are ill-equipped to pontificate, they could just make it so that if your company’s contract is in relation to a definite (i.e. time-bound) project outside of BAU operations (e.g. a receptionist or cleaner), with its own budget, that you’re outside.
Instead, we have a bunch of intentionally vague, unclear “guidance” documents quite clearly hammered out by bureaucratic dilettantes.
[quote name=”Rhys Williams”]Why “thankfully”? Isn’t SDC one of the only easy to understand and reasonably logical test that HMRC have come up with – I could well be missing something here but I’d be very happy if we got to the position where SDC was the primary determinant.[/quote]
I suspect because this is the rule that is most vague and easy to manipulate. In addition, the control clause seems to be where most PSCs fail, almost solely due to bad employer practices.
Almost every company or project I worked in (tech industry) I am always faced with some controlling permanent PM or Director or something similar that has no clue about contracting best practices. It then becomes an extremely arduous process from my side to educate them and explain the need for change. But for most of them, they think this is the contractor trying to do less work. At which point I either have to accept the risk or move on.
HMRC know this and are aware that they can catch pretty much any contractor working in the tech or similar industries out.
Contracts are often well written to guard against this. And these two questions are also fine for most PSCs. But I think agencies will just get scared.
What I never understood though, is if you are caught by IR35 and have to pay NIC and Income Tax. What the hell happens to those hefty corporation taxes and taxes on dividends that you pay (now even more than last year). Do you still pay NIC & IT on top of that?!
[quote name=”Kay”]Almost every company or project I worked in (tech industry) I am always faced with some controlling permanent PM or Director or something similar that has no clue about contracting best practices. It then becomes an extremely arduous process from my side to educate them and explain the need for change. But for most of them, they think this is the contractor trying to do less work. At which point I either have to accept the risk or move on.
HMRC know this and are aware that they can catch pretty much any contractor working in the tech or similar industries out.[/quote]
The bottom line is most clients see their contractors as a “bum on seat” (albeit an ostensibly more costly one) . And then on a “project” , not something where the client has a clue about the specific part of the project (its reqts and deliverables etc) .
Until the CLIENT faces the financial costs of not clearly defining the specifics (which disguised employee = disguised employer would clearly cause) , there is no imperative for the client to change their mindset.