The Finance Bill contains significant changes to the taxation of off-payroll workers in the public sector which are due to come into effect from 6 April 2017.
Who should read this?
All public authorities who hire off-payroll workers, all agencies, third parties and intermediaries involved in the supply of off-payroll workers to the public sector and all workers who provide their services to a public authority via a personal service intermediary.
Summary of proposal
The proposed changes are contained in clause 7 and schedule 1 of the Finance Bill and are designed to amend the UK tax treatment of off-payroll working in the public sector.
Broadly speaking, the Finance Bill provisions do this by requiring public authorities to identify and review the employment status of all workers engaged through personal service intermediaries (referred to hereafter as personal service companies or PSCs) including those provided via an agency or third party.
Where, in the absence of the PSC, the worker would have been regarded as an employee of the public authority (under the IR35 rules), then the ‘fee-payer’ is treated as making, and the worker is treated as receiving, a payment which is to be treated as earnings from employment.
The fee-payer is a defined term, introduced to deal with complexities encountered in the supply chain. Generally speaking, the fee-payer will normally be the person who makes the payment to the PSC. However, where that person is non-resident (say), special rules treat the next person in the supply chain as the fee-payer (and so on up to and including the public authority itself if required). We look at this in a little more detail below in the context of agencies.
The fee-payer (as defined above) will be required to treat the payments made as if they were earnings paid to the worker from a deemed employment with the fee-payer. Therefore, the fee-payer will be required to account for PAYE and NIC (both primary and secondary) on the deemed employment payments.
The new rules apply to public authorities as defined, inter alia, by the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002. It should be noted that this definition appears to be wider than many appreciate and some private sector companies may be caught depending on the terms of their contracts with public authorities. Anecdotally, this is likely to be a particular issue for those involved with the NHS.
Agencies and third parties
One of the issues raised during the consultation was how agencies and third parties could obtain sufficient information on the day-to-day delivery of services by workers in order to form a judgement on employment status. In response the Government has decided to place the onus on the public authority to review and notify the employment status of the worker to the third party or agency, and in doing so, the client must take ‘reasonable care’.
This means that even where PSCs are supplied via agencies it will still fall to the public authority to determine whether an employment relationship would have existed with the worker but for the PSC. If such a relationship would have existed, the worker will be treated as receiving employment income and the agency will be required to operate PAYE and NIC on the payments made to the PSC (see comments above regarding who is the fee-payer).
Where this information about the worker’s status is not supplied to the agency, the agency may submit a written request to the public authority that must be responded to within 31 days. If a reply is not forthcoming within 31 days, the public authority will be responsible for accounting for PAYE and NIC, not the agency.
Supply chains can be complex and it is not always easy to establish whether a third party is supplying labour which will be caught by the new rules or services which fall outside of the rules. We understand that HMRC still intend to provide additional guidance on determining when labour is supplied (also see below regarding the new ESS tool).
Further complexities arise where several third parties are present in the supply chain and for these reasons the concept of ‘fee-payer’ has been introduced. As discussed above, it is generally the third party paying the PSC that will be classified as the fee-payer and so will need to account for PAYE and NIC. However, where there is a supply chain and the third party or agency that pays the PSC is based offshore, the last UK resident party in the chain will be responsible for accounting for PAYE and NIC, up to and including the public authority itself.
Exclusions (not exhaustive):
Workers who are subject to PAYE and NIC as employees of an agency or compliant umbrella company are excluded from the impact of the new provisions.
Enforcement (on public sector authorities)
Where there is a failure by the public authority to respond within 31 days to a written request from a third party in relation to a worker’s status under the new rules, the burden of operating PAYE and NIC (if applicable) shifts to the public authority.
Employment Status: HMRC’s online employment status service tool
Whilst it is envisaged that this will be determined by HMRC’s online employment status service tool (ESS), employment status is a grey area and it will still be important to understand the decisions made by the tool. The tool itself was released earlier this month and HMRC have promised to stand by the result given unless a compliance check finds the information provided isn’t accurate.
Unfortunately, reports to date are that it is generating some results that may not accord with decided court judgments and, in some scenarios, is generating an ‘Unknown’ result.
Key changes from the draft legislation
The Finance Bill was published on 20 March 2017 and contained a number of changes from the draft Finance Bill published on 5 December 2016.
The Finance Bill confirms that the public authority is required to:
The public authority must also demonstrate ‘reasonable care’ in relation to carrying out the employment status review and respond to challenges where this is disputed.
Where the public authority fails to comply with the above obligations, it may become responsible for the underpaid PAYE and NIC together with interest and penalties. Where, however, the public authority has relied upon information that was supplied by the PSC (or a person connected with the PSC or an office-holder of the PSC) that is held to be fraudulent, the liability may be transferred to the PSC.
Where contracts fall within the new rules, the fee-payer will need to determine whether expenses will be taken into account for the purposes of reducing the amount of the payment that is subject to PAYE and NIC.
Timeframes for determining employment status
The Finance Bill clarified that:
The Finance Bill contains an important change to the obligations placed on public authorities who must now take ‘reasonable care’ in determining the employment status of the worker under the new rules.
The risk for public authorities who would intend to take a prudent approach and notify workers that they will be subject to PAYE and NIC from 6 April 2017, but without proper analysis of their position, is that this is unlikely to constitute reasonable care. The concern then is that the public authority could become liable for PAYE and NIC withholding (e.g. where the agency does not deduct for whatever reason) even though it considered it was simply erring on the side of caution by taking a prudent approach.
Information to be provided by the worker
The Finance Bill also includes provisions stating that the worker must notify the fee-payer (see above) whether they are operating via a PSC, partnership or individual that is caught by the rules. This said, there are no timescales specified in which the provision must occur.
If, however, the worker does not provide this information then the fee-payer can assume that the worker is operating via a PSC, partnership or individual that is within the scope of the new rules and act accordingly.
Preparing for the new rules
Preparation for the new rules by public authorities will involve a number of key stakeholders from HR, finance, legal, procurement and payroll who will need to:
These measures will take effect from 6 April 2017.
Concerns continue to be expressed about this timing as many, including ourselves, believe that insufficient time has been provided for public authorities (and agencies/third parties) to introduce the requisite procedural and systems changes to deal with the new rules.
The size of the task and the timeframe may lead some public authorities to simply put all workers with PSCs on the payroll as if they were salaried employees.
However, this action will:
According to HMRC these reforms will bring in an additional £165 - £210 million of tax annually. An earlier estimate by HMRC included in the May 2016 consultation document for non-compliance with IR35 across both the public and private sector was £440 million for the tax year 2016-17. The Government has said that it has no current plans to extend the reform beyond the public sector. But plans can change, quite quickly sometimes and we think these changes in the public sector are but a prelude to wider changes in the private sector to follow in due course.
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