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Off-payroll rules have landed

Public sector IR35 unveiled

Last week saw the publication of the draft provisions for Finance Bill 2017 for PSCs working in the public sector, along with HMRC’s technical note and summary of responses to the consultation document that closed in August 2016.

When is the legislation effective?

The new rules, to be introduced via Chapter 10 of Part 2 ITEPA 2003, will apply to payments made on or after 6th April 2017 and can therefore apply to contracts entered into before that date if they straddle 5th April 2017. If work is completed before 6th April 2017 but payment made on or after 6th April 2017, then it will fall within the new legislation.

Who does it apply to?

Workers providing their services through an intermediary to a public authority will be subject to the legislation. A public authority is one that is defined for the purposes of:

  • Freedom of Information Act 2000
  • Freedom of Information Act (Scotland) Act 2002

This definition covers government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the NHS. It will not however apply to organisations like GCHQ, who are not subject to the Freedom of Information Act.

What are the new rules?

Up until now, contractors earning a rate of £220 per day or more or on contracts of more than six months have had to provide assurances to the relevant public sector body that they are outside of IR35. These thresholds do not apply to the tax rules.

As from 6th April 2017, the responsibility for assessing a worker’s employment status will shift to the public authority, agency or third party paying the intermediary. They will also be responsible for deducting and paying over any PAYE tax and NIC (including employers’ NIC) to HMRC.

It was originally proposed that separate gateway tests be considered to ascertain whether or not the IR35 rules had to be considered. This has been abandoned and instead the engager will use HMRC’s online employment status tool which the Revenue believe will accurately determine, at the start of a contract, whether the rules apply in the majority of cases,

The questions used in the tool will be based on case law and HMRC will provide clear and simple guidance explaining technical terms, how the questions might apply and what to do if the circumstances of the contract change. The tool will be updated to reflect any new case law.

Where the tool cannot provide a definitive answer, HMRC will provide guidance and support. No prizes for guessing which side of the IR35 fence a borderline case is going to fall!

HMRC’s technical note contains a number of illustrative scenarios but mostly in situations where the new rules are likely to apply, particularly where the worker is:

  • Required to work at the end client site
  • Supplied with equipment by the end client
  • Directed in their work by a manager or other officer of the public sector body
  • Leading a team

The one example that involves a contractor, Jasmine, working to a local authority and is not caught by the off-payroll rules is obvious as she:

  • Works mainly from her own office
  • Provides her own equipment
  • Employs her own staff
  • Meets her own costs and expenses

Another example, Janice, highlights the point that although a contractor may be involved with a public sector body during their work, if they do not have a contract with that organisation then the new rules cannot apply. Here, Janice’s own company is contracted by a building company to project manage the building of a new wing at a hospital managed by an NHS Trust. Although she has a degree of interaction with the Trust managers, who have an interest in her work, Janice’s contract is with a private company and therefore not in the public sector. As such, the off-payroll rules do not apply and Janice must consider whether or not IR35 applies. In making this decision she will be able to use the online Employment Status Service, should she choose to do so.

If the engager decides the new rules apply then they will deduct tax and NIC from the contractors’ VAT exclusive fee before payment is made and the worker is treated as receiving a deemed employment payment.

The public sector client must inform the intermediary, agency or third party with whom they have a contract whether or not the contract falls within the off-payroll rules. This conclusion can be included in the contract or separately. Where the public sector body fails to provide such notification, then a request may be made in writing that the information be made available, together with the reasons supporting their conclusion. Failure to respond to such a request within 31 days of receipt will result in the public sector body becoming responsible for accounting for PAYE.

To enable the “fee payer” to deduct the correct amount of PAYE tax and NIC, the worker will be legally required to provide their National Insurance number, tax code and identity details.

For tax and NIC purposes, the worker is treated as having an employment with the fee payer, so once the contract ends they will be given a form P45 and, presumably if the contract spans a whole tax year, form P60. The relevant pay and tax details will then be entered on the contractors’ employment supplementary pages of their self-assessment tax return.

Expenses and pension contributions

A PSC will still be able to make pension contributions on behalf of the contractor with relief being obtained through the company.

Whilst the 5% allowance to cover unspecified expenses has been removed, HMRC have said that PSCs will still be able to claim allowable business expenses but what will be the mechanism for overheads that do not count as expenses of employment, such as accountancy for instance? If these are only going to be allowable for corporation tax purposes and the PSC’s entire income consists of fees earned from a public sector contract caught by the new rules, then it will incur losses that will either be relieved by carrying back to an earlier year or carried forward to the next accounting period.

The government says it has no immediate plans to extend the new rules beyond the public sector but it is difficult to believe this especially when HMRC is faced with future resource and budgetary challenges.

Noises from the grapevine suggest that many public sector organisations will adopt a safety first policy and treat all workers as being caught. Whilst a contractor is at liberty to appeal a decision this would mean inviting an IR35 enquiry and could end up in the tax tribunal, which is both time consuming and costly. As a result many contractors may turn their backs on the public sector but are there enough opportunities in the private sector to compensate?

By Andy Vessey

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46 thoughts on “Off-payroll rules have landed”

  1. Alex

    Arrghhhhh!! It’s so ridiculously complicated. Who are the idiots who come up with this stuff?

    I, for one, will not be taking any public sector contacts from now on.

  2. Alan Shulman

    Public Sector contract will be FixedTerm Contract and paid as salary, simple as. Although rates for FTC will have to increase significantly to be a match for previous daily contract rates.

    • Steve

      Yep, just been offered exactly that. Still umming and ahhing about taking it. Thankfully the pay differential in this case is quite small (going through an umbrella as opposed to a PSC).

      But for those using a PSC in the public sector… this is likely to be a death knell. More work will be swallowed up by the outsourcers/MSP’s or wont get done at all.

      • Alex

        More work will likely go to outsourcers and MSPs, who in turn will have to recruit additional resources for short term pieces of work that they deliver to the Public Sector client.

        Chances are those additional resources being recruited by a private outsourcing company (who aren’t subject to these off-payroll rules) to work on a Public Sector end client are the same people the Public Sector client would have engaged in the first place. Only now they are having to pay huge additional overheads charged by the outsourcing company.

        And as we know, many of these ousourcing companies are owned by overseas companies who will no doubt declare their profit in a country other than UK and as such all this rule is doing is making it more expensive for Public Sector organisations to get the work done whilst likely channeling more tax money overseas. And the way they’ll address that? Yep, they’ll shortly apply this legislation to private companies as well!! 🙁

  3. RC

    Plenty of opportunity for IT work in the private sector… in fact there’s a massive shortage of talent.

    I’ve not worked a public sector contract before, but never ruled it out… until now. Just not worth the stress.

  4. steven monk

    No more government contracts for me. Not worth the hassle or the pain. I assume that anyone who does get hit be this would then be entitled to all the benefits their directly employed co-workers enjoy. Holiday, sick pay, pension etc. If not then I can see legal cases being brought against the public sector for discrimination.

  5. mark williams

    well Bodes badly for the outcome for both contractors and the government body
    If you really don’t want to employ the self employed just put an embargo on it and we will all walk away happier understanding the position rather than this time wasting incomprehensible imposition

  6. PeterH

    I am assuming that, at some point in the not too distant future, the Office of Tax Simplification will go into meltdown over this dog’s breakfast of a plan. Sounds horrendous from this description.

  7. Richie

    Simple, I’ll have a contract with an agency. That agency says it will complete certain tasks and goals for the government for a certain project. The agency contract won’t be to provide workers but to provide results. It just happens that it will provide workers to complete the tasks and will allow management input from public sector managers. I’ll be working for the agency, not the government.

    I’ll invoice the agency for days worked, once a month the agency will say to the government that it had x amount of man hours worked.

    Bit more paperwork and agency will take a cut but not the end of the world. I’ll just have to put up my rates, but with contractors leaving due to the new rules the market will take it.

    • bolshie

      Good luck with that richie. You appear to have a massive misunderstanding of the regulations. And as for ‘putting up (your) rate’ to compensate, what are you putting up your rate to compensate if you believe you’ll be working for the agency not the Government?

      Contractors who have worked exclusively in the Public Sector for 5 or more years may find it almost impossible to find a contract in the Private Sector. Niches, that’s what contracting has become.

      • Viktor

        @bolshie:
        “Contractors who have worked exclusively in the Public Sector for 5 or more years ” – I dont see why that would be the case? In IT at least what matters is what your skills and experience are, not your preovious clients?
        I also dont agree that contracting is niche now, there is no shortage of various contract roles, in London at least

  8. Bob

    WTF are the Revenue up to?!?! This is surely the start of destruction of the contractor market. My current assignment is caught in IR35 and it’s almost not worth it, guess that’s what they want.

  9. Jay Bhayani

    If have worked in the private sector and the public sector. I too do not want to go back to public sector BUT let’s be honest, it is all rate dependent. If the rate increases to give a net amount the same as the private sector people will still go for it. I personally would want 10% more for the extra faffage

    • Guy

      200%, more like. You need the difference in pay made up and you need a safety net on top for related unknown/unforseen liabilities for the next seven years till you get to destroy those accounting archives in 2024 for next year, etc.

    • Ian T Price

      10% Jay? I think you have to do your sums mate.

      I’m currently on £555 per day. My rate will increase to £1,200 per day to match the same remuneration at year end.

      You have to consider such factors as the lost of any tax allowance once a person declares earnings over £100k (£400 per day rate) and the fact that any increase in rates means you pay more corporation profit @ 20%, etc, etc.

      Do the math. Aa a minimum a doubling of rates is what people are looking at for this change.

      I wonder if the government have factored this into their budgets? Maybe they think the extra revenue will come from the IR35 changes; but that money will come from the government…

      And down the rabbit hole we go!

      • ND

        I’m really confused and only been contracting for 6 months in the public sector. Can you explain the maths behind this?

        I am currently on £425 per day. Take £8000 salary. Approx £5000 per year expenses. And base myself on a 46 week year.

        Also you lose your personal allowance at £122k (not 100k)

  10. Steve

    So based on the new pension rules if we are classed as employed, do they auto enroll us in a pension too?

  11. JGC

    The large consultancies must be rubbing their hands with Glee! This will push highly skilled and cost effective contractors out of the public sector to be replaced with less skilled and significantly more expensive consultants. HMRC have score a major own goal with this

  12. SG

    The government are determined to kill off contracting. It’s just a matter of time before this gets rolled out to the private sector.

    In the meantime anyone wishing to contract in the public sector will just have to increase their rate by 50%

  13. Goony

    What happens when the public sector deem you outside the’s rules and then hmrc decide you require inside. The public sector will be liable of the tax and NI …but then will they try to re-coop that from the contractor? Not worth the hassle for me.

  14. Worried Contractor

    From reading the technical guidance note it would appear that the client will be responsible for deducting (as source) income tax and employees NI from my billed contract amount. They will also be responsible for the secondary NI. Ie, paying (from their own pocket not my contract value) the Employers NI. Please read the guide and tell me what you think. Finger crossed they are to pay the Employers NI, all the example suggest that is the case.

  15. Rob Green

    This legislation is yet another step in the “shoot yourself in the foot” approach of Government to such matters. Over the years, contractors have had to cope with hostile civil servant organisations pushing against the use of freelancers and in tandem the big consultancy firms have lobbied (for their own interests) against the use of freelancers. What we now have is further ammunition for those interests. The irony is that more than ever before, big consultancies get vast sums of money from Public Bodies for their “services” but they often simply employ the same freelancers that could have worked directly for the Government! In my case, I now work for such a consultancy, and the Government end up paying approx three times my daily rate for my services! The Government really don’t have a clue do they?

  16. daisypenny

    I’ve already been refusing contracts for government roles and citing: “IR35 tightening and Autumn Statement 2016”.

    Ideally we all need to abandon government contracts from 31st March 2017. Easy for some to say, but could bring hardship to others.

    Alternatively perhaps those in government roles could hand in their notice with effect from 13th April 2017 (1 week into the new tax year). That way the government department would have to go through all the pain of setting up the payroll information, issuing P45s and subsequent P60s, Auto-Pension enrollment, gathering and inputting the NI data etc etc. just for the 1 week. It also provides difficulties in terms of whether dole payments are available. Could there be a case for constructive dismissal? It opens up cans of worms.

    Also having many occurrences of lack of of workers all at the same time would put additional strain on the systems that were being supported.

    Would resources then need to be obtained from the open market? Perhaps there is a supply and demand situation and thus rates need to be agreed.

    If we all did this, or something on those lines – open to suggestions – what would be the response?

  17. Mac

    I think they will drop this, no-one is talking about the new VAT flat rate of 16.5%, that’s an immediate annual loss of 3K PA for me. Personally I think off-payroll will go but they’ve sneaked in the FRS and that will stay

    • Russ

      Yes, for each £1000 billed, HMRC will allow £3 to cover your VAT costs, that will barely cover the costs of an accountants VAT so I’ll be dropping the FRS. I remember when it first came out, accountants told us not to bother as the rate was rubbish, then it was reduced and they said go for it, now the rate is even worse.

  18. Robin

    Although the public sectors are acting bullish forcing contractors to work within IR35; I think they don’t fully appreciate the implication. (IR35 if a contract does not exist, would you be considered an employee of the company?) This means, the contract which has clauses relating to ‘right of substitution’ must be a sham. Sham contract mean no contract. If you find yourself in a unfortunate position of requiring long-term sick. Then ask HMRC for adjudication on whether you are in or out (their default condition is that unless you can prove otherwise HMRC will say you are inside. i.e. an employee. Then claim sick-pay holidays etc.

  19. Neil

    I’m working for NHS Wales currently on a contract until the end of March. Debating whether or not it would be worth taking an extension in April, given that my commuting costs here are very low (20 minute bus trip each way)

    Anyone know how umbrella companies are affected? Would it be worth me going umbrella to stay here, given that they are taxed at source?

    • Tom

      Umbrella companies would fall outside of all this, as Tax is paid at source by the them. These changes only apply to the use of PSC’s. If your rate is under £300 per day, Umbrella will definitely be the way forward!

      • Steve

        True in concept but the NHS are being leaned on to reduce the number of contractors anyway. Had the one way chat with my hiring manager at an NHS organisation this week, where its basically a case of “take the offer of FTC or GTFO”.

        How much of that is him being bullish and how much is him being leaned on from above, I’m not sure.

      • Steve

        True in concept but the NHS are being leaned on to reduce the number of contractors anyway. Had the one way chat with my hiring manager at an NHS organisation this week, where its basically a case of “take the offer of FTC or GTFO”.

        How much of that is him being bullish and how much is him being leaned on from above, I’m not sure.

  20. Fred

    Public sector contractors may move to private sector (if they can) but if they do that en masse then we will have a surplus in the private sector and all rates will go down. This will cause a crisis for the government as many of its institutions heavily rely on contractors.

    This will go down to how much fuss contractors (as a unit) make about this. It isnt about private vs public, its about the way we do business. We are always vilified as if we are out to get the people’s money, when in reality major corporations and bankers are literally defrauding the British public and no one dares ask them a question.

    Then you get all the changes to the FRS, the constant scare of IR35, the whole shaming thing from peers who think you are leeching on their bonuses. It’s so unhealthy, particularly in a post-Brexit UK where contracts will already be squeezed as many multi-nationals re-assess their entire European strategy.

    What IPSE suggested once, the Freelancer Service Company remains the ideal solution for me. Shame no one listened.

  21. Biggus Dickus

    They are trying very hard to force everybody back into employment and hence paying half of what they earn in taxes.

    If there is a max exodus from the public sector the Government will simply let in even more Indians to fill the positions. It’s a win win! Us pesky contractors get put in our place, Government gets its flexible work force on the cheap.

    Te days of contracting as a career are fast coming to a close. Time to start looking at Plan B, mine involves Tax Credits…

  22. Russ

    Why do we still need to be working through a limited company, if they want to pay us PAYE, I don’t want the money going into my company causing a nightmare of moving money about and why should I pay for an accountant. Also how can I use salary sacrifice to fund my pension scheme if the NI & PAYE is taken before I get it, it’s alright for the civil servants with their gold plated pensions making up these rules.

  23. Soprano

    I think we can tell this is all show and tell made up by dilettantes without the foggiest idea about how business works in the real world. I know this is the public sector, but I hope these hopeless chaff-for-brains (the likes of knuckle-draggers like Hodge) don’t try to extend it to the private sector.

  24. Woof

    Impossible to implement.
    Be an employee only of a company, and be on minimum pay.
    Make your dog the Director instead of yourself – dosen’t need a NINO for that.
    Pay the dog the Dividends.
    Woof woof.

  25. Geoff

    Let us just hope that Self Employed MP’s, in their capacity as MP’s, are classified as a public body for this purpose. Then their self employed staff (=family!) will fall under this heading.
    They can reap what they sow.

  26. Geeno

    Does IR35 currently apply to Private Sector contracts?

  27. Marcus Harris Incite Insight

    From an agency point of view. Where someone is deemed to be within IR35 we will have to employ them charging Tax and Ni at usual rate but also paying Holiday and sick pay. As a result we need to increase the rate to the public sector client by about 25% to compensate the contractor. Advantages seem to be no limit to length of contract as the contractor is employed not contracted, paid holiday and sick pay and no risk of an inspection. The client on the other hand is paying about 25% increase to cover talent and a 15% increase to the agency to cover NI payments and extra administration. Does that sound right?

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