IR35 reform – public sector

What is changing?

From 6 April 2017 where the public sector engages an off-payroll worker through their own limited company, that body (or the recruiting agency if the public sector body engages through one) will become responsible for determining whether the rules should apply and for paying the right tax. The measure will have effect for contracts entered into, or payments made, on or after 6 April 2017.

Outline

The off-payroll rules (often known as IR35, or ‘the intermediaries legislation’), ensure that individuals who work through their own company pay employment taxes in a similar way to employees, where they would be employed were it not for the personal service company (PSC) or other intermediary that they work through.

This measure moves responsibility for deciding if the off-payroll rules for engagements in the public sector apply from an individual worker’s PSC to the public sector body, agency or third party paying them. The measure also makes that organisation responsible for deducting and paying associated employment taxes and National Insurance contributions (NIC’s) to HM Revenue and Customs (HMRC). This change does not affect workers and PSCs who provide their services to private sector organisations.

The 5% allowance currently available to those who apply the off-payroll rules to reflect the costs of administering the rules will be removed for those who work in the public sector. These changes will also introduce a requirement for public sector bodies to provide information to agencies and workers about whether engagements are within the off-payroll rules.

HMRC have a digital tool found (see ‘Check employment status for tax’ guidance below) to help identify whether engagements fall within the off payroll rules to support customers impacted by the reform.

The changes

Legislation is found in section 7 and Schedule I of the Finance Bill 2017 to include a new Chapter to the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA 2003’)  and relevant NIC regulations, so that where an individual works for the public sector, through their own PSC and falls within the rules:

•    the public sector engager or agency is treated as an employer for the purposes of taxes and Class 1 NIC’s

•    the amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income (or of earnings for Class 1 NIC’s) for that worker

•    the public sector engager or the agency is liable for secondary Class 1 NIC’s and must deduct tax and NIC’s from the payments they make to the intermediary in respect of the      services of the worker

•    the public sector is defined using the definitions in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Acts

•    the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using Real Time Information

•    the 5% allowance intended to be used by the worker’s intermediary for certain business expenses is removed, for those contracts with the public sector. The worker’s intermediary will still be able to claim allowable business expenses

 

Guidance for employers to ‘check employment status for tax’

The government has published guidance on whether a worker on a specific engagement should be classed as employed or self-employed for tax purposes.  The service can be used for current or future engagements in the private or public sector.

The guidance gives HMRC’s view on whether the intermediaries’ legislation (IR35) applies to an engagement and whether a worker should pay tax through PAYE for an engagement. HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate.

The service is anonymous and no information will be stored by HMRC but users will able to print the result for their own records.

To use the service, a user will need to know:

·         The worker’s responsibilities

·         Who decides what work needs doing

·         Who decides when, where and how the work is done

·         How much the worker will be paid

·         If the engagement includes any benefits or reimbursement for expenses

The guidance is found here

 

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