Public Sector Workers Post April 2017 – To be employed, or not to be employed!
Over recent 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 or as it is often referred to as a One Man Ltd Company).
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, so in 2017, we are set to see one of the biggest shake-ups of the industry to date.
On 6th April 2017, it will become the responsibility of the public body* (rather than the PSC) to determine whether the relationship between the worker and the end user would be one of employment. If it would, income tax and NICs will be payable i.e. the contractor would have to be paid via PAYE.
Where this is the case and there is deemed employment, the organisation that pays the fee to the PSC (whether that is the public body or an intermediary potentially the recruiter in many cases) 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.
It is important to note that the 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).
So what does this mean to the clients and the intermediaries?
Draft provisions of the Finance Bill 2017 have been published which introduce a new chapter 10 of Part 2 ITEPA 2003 and also amends 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 an online tool (due for launch on 6th April 2017), which can be used to determine whether the off-payroll rules apply. In the consultations, HMRC made it very clear that its previous guidance on employment status will need to be taken into account. If there is deemed employment, the PSC or the intermediary who pays 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, we predict negotiations will ensue between the PSC, intermediaries and public bodies to determine which organisation will shoulder these additional costs.
What you do need to know is that these changes are implemented for tax purposes only and not for employment 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.
So what will you need to do?
- Public bodies and intermediaries should review all potentially affected contractors and run the new IR35 Tool prior to commencement of the assignment and records kept for evidence purposes;
- 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 and any necessary changes to contracts;
- Intermediaries/public bodies 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 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.
BUT, there is an alternative…
The IR35 Legislation is still in draft form until April 2017, when it will be finalised and released in the Finance Act. This gives both end client and intermediaries only a few months to have everything in place to make the necessary employment tax deductions, which at this point are not 100% set in stone.
So there is an alternative that avoids all the potential complications/headaches for the client & the intermediary…
If a contractor is paid via an umbrella company, then they are deemed to be the employee of the umbrella company and all relevant employment taxes are applied once the umbrella has received the assignment / contract rate. This leaves the client and intermediary with no costly and time-consuming changes to their existing payroll.
The IR35 Legislation does not come into consideration for the purposes of the contractor working via an umbrella and although expenses were removed for tax relief purposes if operating via an umbrella back in April 2016 (sitting under the Travel & Subsistence Expenses Legislation), the changes continue to create a level playing field. Operating via a PSC, contractors in the public sector will no longer be able to have access to tax relief on expenses either.
It is also worth mentioning that if the contractors’ migrate to a compliant brolly, they will gain full statutory employment rights, access to the company pension scheme, a comprehensive £20m insurance package (included within the ContractorUmbrella margin) and other benefits such as childcare vouchers and GAYE payments. The umbrella takes on the employment responsibilities and report all payments via RTI (Real Time Information) direct to HMRC every time payments have been processed, leaving the agency to concentrate on what they are good at, and providing peace of mind to the end client that they will not fall foul of the IR35 Legislation.
So a bit about what you can expect from ContractorUmbrella…
Any contractor working through ContractorUmbrella, becomes our employee and they are employed under an over-arching contract of employment.
If they are paid on a weekly basis, our margin is £29.50 and on a monthly basis it is £108.50. They will only incur that margin as and when we make payment to them. There are no sign-up or exit fees to work through ContractorUmbrella, the only thing we do ask is that the initial contract is at least 4 weeks in length and a minimum of £10.00 per hour for the contract rate. Included within our margin is a comprehensive £20m insurance package, giving the following cover; £10m for Employers Liability, £5m Public Liability and £5m Professional Indemnity.