April 2017 changes to the IR35 treatment of personal service company workers and the effects on the Education sector
In the summer of 2015, HM Revenue & Customs (“HMRC”) proposed changes to how it will deal with the engagement of workers who provide services to the public sector via personal service companies (“PSC”) and who do not go through the payroll of either the public sector organisation or the business agency who supplies them. The changes will affect any payments made on or after 6 April 2017 (regardless of the period to which the payment relates).
What is the “Public Sector”?
The definition of “public sector” and, for the education sector, will include Further and Higher education, maintained nurseries and Academies.
At present, a PSC must decide at the end of the tax year whether or not its engagement (via its owner/ director) is deemed as “employment” or not within the scope of the infamous IR35 rules. This means that, if he/she determines that there is “employment” within IR35 rules, the PSC accounts for tax and national insurance on the workers’ income profits (after deduction of 5% for administration costs), not the public sector body or any employment intermediary (such as an employment agency) . The exception to this is where there is direction, supervision and control by the Public sector body or intermediary for that assignment because the public sector body or intermediary would account for the tax and national insurance in that case.
From 6 April 2017, payments made to a PSC for directly or indirectly providing services to the public sector, will not be covered by the current IR35 rules and the public sector body will have to operate PAYE/NIC and any apprenticeship levies applicable directly in relation to workers which it engages directly. This therefore means the need for new payment systems for the public sector body. In addition, they do this without the current 5% deduction (which will be removed) and so this will impact on the apprenticeship levy calculation.
Where the services are provided via an arrangement with an agency or employment intermediary, it will be the responsibility of the person making the payment to the PSC that is responsible for PAYE/NIC. If the worker is engaged via an overseas agency, with no other UK connection, then the responsibility rests with the public sector organisation.
This all means there will be additional costs for agencies and it is likely that they will seek to pass on these costs to either the public sector body or the PSC.
However, operating PAYE on workers under a PSC in this context will not necessarily expose the public sector body or the agency to picking up employment rights for such individuals, e.g. unfair dismissal rights etc. as this is governed by a different test to that which applies for the tax position. Furthermore, the PSC will continue to be responsible for auto enrolment and payments such as sick pay.
Who is responsible for determining if the new rules apply to the contracting arrangement?
The public sector organisation is responsible for determining if the person providing the work is caught by the new rules and it must notify any agency, involved in the payment chain, of its decision.
To determine if the new rules apply it will be necessary for the public sector organisation to consider if:
(a) the worker is required to do the work personally, and
(b) the public sector organisation decide or have the right to decide how the work should be done?
If the answer to both questions is “yes”, the rules apply.
If the answer is only “yes” to one of the questions, it will be possible to use a new digital tool to determine if the worker is caught by the new rules.
The new employment status service tool was launched at the beginning of March 2017 and can now be found on HMRC’s website. Although it appears reasonably straight forward to use, the tool does not provide the user with any detailed reason’s for its decision but merely lists the answers the user has given with a response that the new rules either apply or don’t. The tool can be accessed by either the public sector body, the worker or the agency so it is expected that queries will be raised about specific answers inserted by the person using the tool.
For any public sector body caught by the above, it will be necessary for the relevant PAYE/NIC to be accounted for on a timely basis to avoid both interest and penalties being levied.
As affected public sector bodies, schools and Further Education Colleges should:
Review all existing contracts where the services are provided by a PSC and notify them (or the agency) of whether or not the new rules will be applicable to payments made after 6 April 2017.
Once a decision has been made the PSC (or agency) can raise questions about how the decision was made and the public sector body has 31 days to respond. The public sector body must therefore have processes in place to deal with any such requests in a timely manner or they can become liable to operate PAYE/NIC.
Review the take on procedures for new contracts post 6 April 2017 to ensure that they are (a) compliant with the new rules, (b) allow for appropriate costs to be picked up correctly and (c) processes are in place to check and notify if the new rules apply to the contract.
Review payment processes for existing contracts to ensure that amounts relevant to PAYE withholdings can be processed through the payroll and in accordance with the requirements of Real-Time Information (“RTI”). Consideration may need to be given to when payments are to be made so that the “on or before” requirements of RTI can be met.
Process the correct VAT position, where the worker’s invoice incorporates a charge for VAT.
Consider its systems - how will the “purchase ledger” and “payroll” systems interact when these invoices are processed?
Consider if the current arrangements / contracts in place allow for the public sector body to recover any additional costs from the PSC (i.e. those that they will now be required to calculate and withhold PAYE/NIC from the payments and remit these to HMRC, together with employer NIC and any apprenticeship Levy)?
Contracts may need to be re-negotiated and drafted; otherwise the costs will sit solely with the public sector body.
As part of our specialist TRRRIM (Tax Risk, Reputation, Resolution Irwin Mitchell) we would be delighted to provide further guidance on this matter and to assist those involved with implementing the changes required.
If you have any further questions, please do not hesitate to contact Paul Spenceley (Paul.Spenceley@irwinmitchell.com) or Jenny Arrowsmith (Jenny.Arrowsmith@irwinmitchell.com).
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