Off-Payroll Working in the Public Sector: Reform of IR35 Rules
The government has reformed the IR35 rules for those working off-payroll in the public sector. Draft legislation has been published in the Finance Bill 2017 that introduces a new Chapter 10 to Part 2 ITEPA 2003.
The rules are set to shift the responsibility for deciding IR35 status from the Personal Service Company (PSC) contractor to the ‘public authority’, as defined by the Freedom of Information Act 2000 or the Freedom of Information Act (Scotland) 2002.
PSC’s found to be within IR35 will have PAYE and NIC deducted from the deemed employment income element of the fee and paid over to HMRC. Additionally, even though the worker will effectively now be on the payroll and their income treated as employment income, they will not be entitled to any employment benefits. Any statutory entitlements will only be available to them through their own PSC.
There is also a significant change to the computation of the deemed employment payment. Where the end client is a public authority, the 5% deduction previously permitted (and still applicable to IR35 cases outside of the public sector) will be removed.
The motive for this is because HMRC claim to have found “evidence of widespread non-compliance” with the IR35 legislation and needed to find a way of making it fairer to those who pay the correct taxes on their income.
This is not the first time a reform of the IR35 rules has been actioned for off-payroll workers in the public sector. In 2012, HMRC introduced the “Business Entity Test” which was a score based series of yes and no questions, giving the PSC points along the way. They needed over 20 points to attain a low risk score, which in turn meant that they were at low risk of being caught by IR35.
Many professionals considered the content of the questions did not relate to the trappings of a PSC’s business. For example, they were required to have their own office premises (separate to their own home), or have suffered a significant financial loss in order to score high points. An average contractor who had just started contracting would not have been able to score highly and would therefore be deemed high risk for IR35. Suffice to say, the Business Entity Test died a death in April 2015 and the new rules outlined above are being introduced in order to bypass the self-assessment aspect of IR35 and therefore provide a more consistent approach to the operation of IR35.
The Chancellor Rt Hon. Phillip Hammond MP confirmed in the Autumn Statement that the changes to the way in which IR35 is applied to public sector contractors, as announced in the Consultation Document in May 2016, are being implemented from April this year. New guidance was released to support this by HMRC on 3 February 2017. However, only draft legislation has been published which is currently going through Parliamentary approval.
The new rules will apply to payments made on or after 6 April 2017 and therefore apply to contracts entered into before that date if it overlaps 5 April 2017. This also means that if the contract ends before 6 April 2017 but payment is made on or after 6 April 2017, then it will fall within the new legislation.
The potential changes represent a significant change in how IR35 affects the contractor population. For instance, gone are the days of catching people out who took advantage of the loophole in the tax system back in 2000, i.e. ‘Friday to Monday’ contractors doing the same job but instead of being employed, setting up a limited company vessel to gain a tax advantage. The legislation has evolved and HMRC seem to be clamping down on those taking advantage of the limited company business benefit, both by the contractor and end clients. In the past, end clients did not have to consider whether their PSC’s were IR35 compliant or not, but since 2012 public sector bodies have had to take a proactive stance. The new legislation goes even further and the Public Sector bodies are now responsible for determining the status of their contractors.
According to the legislation it is the responsibility of the public sector body to inform the fee payer whether or not the new rules apply to the PSC (that is if there is a fee payer in between the Public sector body and the PSC) if the contract is entered into on or after 6th April 2017. If the information is not provided, the fee payer should request the information in writing. If the public sector body fails to provide the information within 31 days of a request, the public sector body will be responsible for deducting the payments themselves as though they were the fee payer. All the agency has to do then, as long as the information has been provided, is deduct the PAYE and NIC, or not, from the fees paid to the PSC. The PSC can then offset this amount paid against their own income tax and national insurance liability in the tax year.
We are yet to discover whether or not this will broaden out into the private sector. Although denied by HMRC now, if this proves successful why would they not roll it out for all those working off-payroll?
Interestingly, in the letter from Chief Secretary David Gauke to all Secretaries of State, he writes,
“…a worker found to be within the rules by a public sector body is likely to also be within the rules if they were to do the same job in the private sector. Therefore moving from the public sector to a similar role in the private sector will not automatically remove the obligation for an individual to pay employment taxes.”
Whilst this does not remove the obligation for an individual to pay their taxes according to their status, moving from a public sector body to a similar role in the private sector does not automatically mean that they are within the IR35 rules for their new contract.
Each engagement must be considered in its own right to determine whether IR35 applies and it cannot automatically apply to completely new contracts.
So, how are public sector bodies going to decide whether the IR35 legislation applies to each off-payroll contractor? HMRC have been working with stakeholders and the government to create an online digital tool; Employment Status Service.
The BETA version of the Employment Status Service asks a series of questions relating to the relationship between the worker and the public body, giving a result at various stages. If you get past the office holders question, it continues to ask about providing a substitute and if answered positively it determines that IR35 does not apply to the engagement. So far so good. If however this is not answered positively, including the use of engaging and paying for helpers, the test continues to dig further into the amount of control the worker has over how the work is performed, the schedule and then finishes off with a series of financial risk questions.
Interestingly there are no questions regarding mutuality of obligations, one of the three main tests of determining employment status. Case law today still confirms the importance of this test for IR35 and the exclusion of this clearly shows HMRC’s disregard for the importance of this test and shows they have chosen specific case law that suits HMRC to base their results on. The final questionnaire needs to be released by the end of March ready for the new changes in April and so it remains to be known how effective the tool will be at determining status. Whilst there is a lot of hype over this new tool, the service is optional to end clients. Use of HMRC’s online tool is not written in legislation, only in guidance from HMRC. It is also worth considering the point HMRC make at the outset, “HMRC will stand by the result given unless a compliance check finds the information provided isn’t accurate.” So even if the result comes out as outside of IR35, HMRC would still want to carry out a compliance check to ensure the information provided is accurate.
The final questionnaire needs to be ready for the new changes in April and so it remains to be seen how effective the tool will be at determining status.
The PSC still has a lot of say about how their status is considered. PSC’s should get their contract reviewed and seek advice from an IR35 specialist in order to give their end client the correct information or renegotiate contract terms if necessary before April 6th.
Croner Taxwise has a team of IR35 specialists who will be able to assess status via a contract review, please contact the consultancy team on 0844 728 0120 or email firstname.lastname@example.org.