In a move intended to stop what the government calls ‘off- payroll’ payments, Public Authorities will be required to deduct tax and NICs on certain payments to personal service companies made from 6th April 2017.
A Public Authority is defined as an organisation that is subject to the Freedom of Information Act 2000 (2003 Scotland). This link provides more information.
Obvious public authorities are government departments, executive agencies, companies owned or controlled by the public sector, schools (including schools that have converted to academies), colleges, universities, local authorities, parish councils, the NHS, (including Trusts, GP & Dental practices and pharmacies), the BBC, Channel 4, the Bank of England and the Police.
- The payments affected will be for contracts that would have been employment contracts, if they had not been arranged between a personal service company and the Public Authority.
- This will have a significant impact on budgets, as employer’s National Insurance will have to be paid at 13.8% on top of the invoice figure.
- Agencies will also be affected by the new rules, if they supply a worker who operates through a personal service company. The agency will have to pay employer’s NICs, but the public authority will have to determine if the new rules apply.
- HMRC launched their new employment status service on Friday 3rd March. If you follow the link below it will take you the site. You can complete the checker anonymously and if the result is that the new rules don’t apply, HMRC will abide by that decision although they will want to check that the answers given are correct. We recommend keeping a copy of the decision for your own records.https://www.gov.uk/guidance/check-employment-status-for-tax
In the meantime, we recommend that Public Authorities undertake an urgent review of all contractual arrangements, to identify those which will be affected by the new rules.
From 6th April 2017, Public Authorities, must decide if payments to non-employees are caught by new off–payroll rules. The new legislation is a change to the existing IR35 legislation, regarding taxation for intermediaries that specifically targets public authority organisations, which the government believes are still paying workers ‘off- payroll’, despite attempts to stop this.
A consequence of the new legislation is that relevant payments by, or on behalf of Public Authorities, will now be liable for employer’s National Insurance contributions at 13.8%.
If an individual, working through an intermediary such as a personal service company, personally performs services, or is under an obligation to personally perform services for a Public Authority, the new rules will apply. This is also the case if the services are arranged through an agency or another third party. If the intermediary is outside of the UK, but the services are performed in the UK, the new rules still apply.
The usual tests for determining employment status should be used. So, where a worker/intermediary company provides materials or equipment to do the work, there is no control over how the work is done or the worker has several clients, it is unlikely that the contract will be deemed to be an employment contract.
Contracts arranged before 6th April 2017 will also be caught, if payment for the work will be made on or after that date.
- The basis for deciding if the new rules apply, is to consider the arrangements for the worker providing his or her services to the client. If the arrangements are such that the worker would have been regarded as employed, but for the existence of the intermediary, then the new rules apply.
- HMRC will be providing an employment status service that can be used to make the decision by the end of February 2017.
If the new rules apply, the Public Authority becomes responsible for calculating a ‘deemed employment payment’, for deducting PAYE and employee’s NICs from it, and calculating and paying employer’s NICs on it.
The organisation must use its payroll’s RTI system to process the payments to the off-payroll worker and is also responsible for paying over the tax and NICs to HMRC with their usual PAYE and NICs remittances.
- The usual RTI rules apply, which means that the payment must be processed ‘on or before’ the date it is made
- If the worker cannot provide a P45 for the current tax year when he or she starts, the organisation should use BR and indicate that declaration C applies on the starter form and on the FPS.
- When the worker leaves, he or she should be given a P45
- The organisation should set their payroll so that the worker’s pay is not picked up for auto enrolment processing, nor for payrolling benefits in kind
The deemed employment payments are included in the organisation’s calculation of the Apprenticeship Levy and Employment Allowance but are not included for student loans.
Although NICs will be due on the payments caught by the new rules, the worker will not be entitled to claim SSP, SMP, SPP or SAP from the organisation, nor will they be entitled to claim statutory redundancy pay, National Minimum Wage or auto enrolment rights. All of these entitlements stay with the worker’s intermediary company, the agency or other third party.
Agency supply staff
Even if the organisation will not be paying the worker directly, perhaps because its contract is with an agency, it is still responsible for making the decision about whether the payment is caught by the new rules, and it must communicate this to the payer (i.e. the agency). The payer can ask for this decision and the organisation has 31 days to comply, or it will become responsible for the tax and NICs on the deemed employment payment. The worker can also ask the organisation for the reasons for the decision. Again, they have 31 days to comply.
Procedures should be introduced so that every person provided through an agency, is asked to confirm if they are employed by the agency or if they provide their services to it through a personal service company.
Anti-avoidance provisions
Where the agency or third party is offshore, the liability moves to the next person in the contractual chain who is in the UK – which could be the Public Authority.
Changes to the IR35 rules for the intermediary
The 5% deduction that applies to IR35 engagements, has been removed from payments that are caught by the new legislation.
The new legislation will include double taxation provisions, to ensure that the deemed employment payment on which tax and NICs has been paid can be set against the amount of remuneration from the intermediary on which tax liabilities arise.
Taking a dividend
- The worker can take a dividend from the personal service company, up to the total net fee received, free of tax
- The dividend does not have to be declared on the worker’s self assessment return
Taking a salary
- The worker can take a salary from the personal service company, up to the total net fee received, free of tax and National Insurance
- The payment has to be recorded through the Personal Service Company’s own PAYE scheme and reported on the FPS submission as non-taxable
Corporation Tax calculation
- An adjustment should be made in the corporation tax computation to ensure that none of the income to which the new rules apply, is charged to corporation tax.
We are waiting for clarification on
- Penalties – who will be liable for any penalty that arises for non-compliance?
Payroll considerations
Your payroll software company may already have updated their programme to deal with this new category of deemed employee, but, if you are likely to have to process payments under the new rules, it is worth checking.
Technical terms explained
Deemed employment payment
The amount of the payment, less VAT, cost of materials and expenses that would qualify for tax relief.
Personal service company
HMRC’s example of a typical personal service company is a company with one or two directors, where the shareholder director provides his or her services to the client and the other director is a company secretary, who may also be the first director’s spouse. However, in the context of IR35 and the new legislation, the term ‘personal service company’ is broader than just an incorporated business, as it includes partnerships, LLPs and even individuals if they are an intermediary between the worker and the client.
Conditions for a personal service company are:
- Companies – the worker, taken together with associates, such as spouse, parent or child, owns 5% or more of the company’s share capital
- Partnership or LLP – the worker, alone or with relatives, is entitled to 60% or more of the profits
If you have any questions, please contact our Employment Taxes team or your usual BHP contact.
