HMRC publish guidance on off-payroll working in the public sector
Late last week, HMRC published its guidance on the impending public sector off-payroll rules albeit somewhat limited and lacking any real meaningful detail. The guidance is contained within four documents.
There is further confirmation that the new rules apply to payments made for contracts entered into before 6th April 2017 but straddling that date. Where work is completed before 6th April but payment made thereafter, then the rules will still apply.
Reform of intermediaries legislation
Key responsibilities
| PSC or other intermediary | Fee-payer | Public Authority |
| Provide fee-payer with information they need to help determine if off-payroll rules apply | Operating employment taxes associated with the contract | Decide whether off-payroll rules should apply initially and when there any contractual changes |
| Where rules apply, provide fee-payer with information required to allow them to deduct tax and NIC | Paying the deemed payment direct payment to the PSC | Notifying agency or other third party, where applicable, whether off-payroll rules apply |
| Reporting to HMRC on own and company’s tax affairs | Reporting the employment taxes deducted through RTI | Where it does not reply to the written request from an agency/other third party as to whether off-payroll rules apply within 31 days, become responsible for accounting for PAYE as if it were the fee-payer |
| Paying employers’ NIC |
Pre-6th April 2017 preparations
Public authorities, agencies and third parties supplying contractors should consider existing contracts and prepare for the change. Will this stir up a hornet’s nest whereby an engager may decide that an existing contract, previously considered to be outside of IR35 by virtue of the existing assurance process, should in fact be caught by IR35?
Employment Status Service (ESS) tool
Interested parties can use the online tool to obtain the HMRC view of whether any current and prospective workers would fall within the new rules. The user answers a number of questions around the relationship between the worker and the public sector client, from which an answer on their status is provided.
The service is optional and is expected to be made available by the end of this month.
Excessive tax deductions
If a contractor thinks they have been taxed incorrectly, they can submit a repayment claim to HMRC. If HMRC agree, then they will issue a repayment of tax and/or NIC.
Changes
From 6th April 2017, where the new rules apply, the client, agency or other third party that pays the contractor, known as the fee-payer, will deduct income tax and employee’s NIC from the contractor’s fee. These deductions will be paid directly to HMRC and will reflect on a freelancers’ tax records and contribute to their state benefit entitlement.
Deciding if the rules apply
This will be informed and influenced by a variety of factors based on the nature of the contract and the services provided by the contractor to the public sector client.
The ESS tool can help the public sector body make their decision and will be for use where a contractor obtains the work via an employment agency or other third party. Only in those circumstances?
Payments received from the fee-payer
HMRC have provided an example of the process of paying the contractor where the off-payroll rules apply.
PSC invoices fee-payer £6,000 + £1,200 VAT = £7,200
Fee-payer deducts £1,871 (£1,458 tax & £413 employee’s NIC) which it pays to HMRC
PSC receives £4,129 (£6,000 less £1,871) + £1,200 VAT = £5,329
The PSC will be allowed a corporation tax deduction up to the full amount of the deemed direct payment to prevent double taxation. This will be equal to the net fee. So, in the above example this would be £4,129.
Should the director decide to extract the full £4,129 as salary, then no further deduction of tax or NIC by the PSC is necessary, otherwise this will have been taxed twice. This will however have to be reported to HMRC as non-taxable payments on the Full Payment Submission (FPS) of RTI reporting.
Alternatively, a tax-free dividend up to the total of the net fee received can be paid and which does not have to be reported on the director’s self-assessment tax return.
Public authorities: using a personal service company
This informs of the steps for public authorities to consider when engaging with a PSC and where the PSC is paid direct their payroll department must note that the contractor will not be:
- entitled to statutory payments
- subject to student loan deductions
- enrolled in to the authority’s pension scheme
Once the contract is ended a P45 must be given to the contractor.
If the ESS indicates that the rules don’t apply, then the public sector body must retain the records that support this decision.
The payroll processes for fee-payers are set out in this part of the guidance.
HMRC advises that there is no need for fee-payers to add PSC workers to their existing payroll but can be done on a discretionary basis.
The payroll requirements will largely be the same as the information reported for existing employees.
Starter information
When a contractor starts work, or when circumstances change that result in the off-payroll rules being applied, the fee-payer will be required to send a starter declaration (work out a new employee’s tax code) to HMRC. They are instructed to use Starter declaration C for workers engaged via their PSCs as the PSC is the contractor’s primary employment, so the services provided by them are treated as a secondary employment. This will mean that a tax code of BR will be operated and therefore basic rate tax deducted.
There is no requirement for a contractor to provide the fee-payer with a P45 from a previous employment.
Just glad I did not accept that Public Sector contract offered to me. Anyone with any sense will do likewise.
Yep. Binning this Public Sector Contract one invoicing cycle before the end of March and won’t be accepting any more for the foreseeable.
They can either find permie talent to do this (good luck with that on Council pay scales) or another guy who will do it under those HMRC terms.
I imagine the fallout won’t be really noticeable to Joe Public until this time next year by which time the Govt will have thought up some pretext for it involving some other legislation they want to get through to ‘solve the issues facing the sector’.
And you also have to pay Corporation Tax after all these deductions are made so in effect paying double tax !!, would avoid Public Sector like the plaugue
I guess you missed this bit:
“The PSC will be allowed a corporation tax deduction up to the full amount of the deemed direct payment to prevent double taxation. This will be equal to the net fee. So, in the above example this would be £4,129.”
Just finished a contract in the public sector, won’t renew. Anyone who has a choice of private and public sector contracts will just steer clear of the public sector now.
What I am still confused about is that If I draw all of the money received by PSC, from my IR35 caught contract, as dividend then I don’t have to declare them on my SATR.
-How would I prove my earning if applying for a mortgage? My SA302 would have a nill value
-Let’s say I draw the full tax-free dividend up to the total of the net fee received.
For argument’s sake, let’s say that figure is £49,548, to keep it line with the example above.
What happens if I then draw dividend above that amount (ie profit from another contract or money left in the PSC from a previous tax year). What rate of dividend tax will I pay on that?
Although my of the Pubic Sector contracts end on 01/04/17. I don’t think the Pubic Sector are fully aware that they might loose the their contractors a week early, in order to ensure they stay out of the new system. The last thing we want is someone with little knowledge of IR35 informing the ‘fee-payer’ that the off-payrole rules apply. This is like someone waving a red flag at HMRC saying we believe this guy should be inside IR35. Aged 64, I don’t want the potential of a HMRC inverstgation lasting 20 years.
Getting to the point where a free house and 25K a year benefits is looking very appealing.
Current CL1 contract with MOD ends 05/03 the team are desperately in need of temporary Man Sub and there is a 3 month extension being processed which I will not be able to accept (everybody looses). I have been subject to an IR35 enquiry once before. The result that time was HMRC arranged interview with deemed employer. Result was deemed employer did not renew my contract. HMRC lost ensuing status fight (everybody looses)!
Already applied for contracts in Europe to EXITBR.
Its a shame the government has finally awoken to the hoard to us contractors manipulating the system and not paying the full taxes as do the permanent staff who do the same jobs. Its easy for us all to justify this because of our unique skills, but it looks like someone in HMRC has hit the reality button. Public Sector today, and once settled I predict it spreading throughout. Oh well, it was a good run.
I don’t think we’re manipulating the system at all…simply following the rules currently in place by HMRC. If those rules change and we are to pay the same taxes as perm’s, should we not get perm’s benefits too? Paid sick, paid leave, pensions?
I am one of those public sector contractors walking away a week before my contract is due to end on the 1st April. We’ve been told it’s up to the public sector employer in conjunction with HR and a meeting with me to decide if I’m in or out of IR35.
I’ve made my own decision. I’m walking away on the 24th March. Back to the private sector for me despite them wanting to renew me for another 6 months to deliver a key project.
As for contractors manipulating the system, I also disagree. We’re paid to carry the risk, we have to pay insurance premiums, our own pensions etc etc.
Shame they don’t challenge the big corporations or famous people who really manipulate the rules. Too many to mention.
I agree with all of the above and it’s just matter of time before it’s rolled out to the private sector too.
I’m just surprised massive contracting groups haven’t really battered an eyelid or done anything serious about it…
If this happened in France the country would have come to a stand-still due to street protests and sit-ins. Viv la France!! LOL