From off-payroll to on payroll
Those pre-Budget newspaper stories about the Government tightening up the rules for ‘off-payroll’ workers in the public sector were actually true as George Osborne announced in the Budget that IR35 for public sector engagements will be reformed…
From April 2017, PSC’s supplying their services in the public sector will be relieved of deciding their IR35 status and this responsibility will become that of the public sector client or agency or another third party. One of those three will have to decide whether or not IR35 applies to a contract and, if so deduct and pay over to HMRC the necessary PAYE tax and NIC.
Where a PSC is engaged via an agency or other third party, then the party closest to the contractor in the supply chain will be the one responsible for enforcing the rules.
In a Budget technical note, HMRC explain that they will introduce clear objective tests for engagers to use to decide at the point of hire whether or not they need to even consider the new rules and then to quickly and decisively identify those engagements that are clearly caught by the rules.
For cases that are less clear cut HMRC will develop a simple and straightforward digital tool to assist engagers in deciding if IR35 is relevant.
HMRC will provide simplified guidance, including the digital tool, to provide up front certainty. By answering the questions in the guidance and using the tools will give the engager HMRC’s view of the correct tax treatment. This would seem to suggest that the tests applied will be more limited than those currently used in deciding employment status together with HMRC’s narrower interpretations.
Businesses and agencies within the private sector will also be able to make use of the new digital tool. Presumably this will be a version of the Revenue’s current Employment Status Indicator (ESI) online tool that HMRC are developing for use within the contracting industry anyhow.
It is important to note that contractors working within the private sector will continue to be subject to normal IR35 rules and will not be affected by these proposed measures.
Where these new rules apply, they take precedence over the current IR35 rules.
Meaning of public sector
Public sector will mean organisations that are public authorities for the purposes of the Freedom of Information (FOI) Act 2000 and Freedom of Information Act (Scotland) 2002.
The FOI Acts define the public sector under broad categories:
- Government departments, legislative bodies, armed forces
- Local government
- NHS
- Schools and further and higher education institutions
- Police
- Other public bodies such as the BBC, Channel 4 and The British Museum
- Publically owned companies (wholly owned by the Crown and/or the wider public sector such as Transport for London)
This is not an exhaustive list.
Where a public sector organisation engages a contractor via an agency then they will have to inform them that the new rules apply and also check that the agency are operating the rules correctly.
For more complex contractual chains, e.g involving a series of agencies or when the liable agency/organisation is offshore, there will be special rules. Where a series of agencies are involved or other third parties in the chain, the party closest to the PSC will be held responsible for complying with the rules.
Deducting PAYE tax and NIC
Where a contract is deemed to fall within the new rules the engager will be required to calculate the deemed employment income. This will be the fee paid to the PSC excluding VAT and minus the 5% fixed deduction that is currently allowed under existing IR35 legislation. The balance will then be subject to tax and NIC and reported under Real Time Information (RTI).
Example 1 – Central Government – rules apply
Grace works through her own PSC and is appointed as a senior analyst at the Ministry when the post holder leaves. She is a locum appointed to a project for 5 months while the job is advertised. Human Resources uses HMRC’s online tool to see that Grace is working in the same way as an employee and the new off-payroll tax rules apply. Payroll are informed and tax and NICs are deducted from payments made to Grace’s PSC. The Ministry pays the secondary NIC and accounts for the tax and NIC liabilities under RTI.
Grace’s PSC invoices the Ministry monthly for £2,400, which includes £400 VAT. The Ministry treats £2,000 as Grace’s earnings and deducts £223 tax and £159 employee NIC, which it pays to HMRC via RTI with £183 employers’ NIC. The Ministry pays Grace’s company £1,618*.
As Grace has paid income tax on income going into the PSC, she receives a credit against employment and dividend income drawn out of her PSC so she does not pay tax twice. The corporation tax liabilities of Grace’s PSC will remain unchanged by the measure.
Example 2 – Local Government using an agency – rules apply to the agency
Charlie is a locum social worker within the Child Protection team at a County Council. The Council contracts with an agency to supply Charlie for 9 months. He is not an office holder under the Local Safeguarding Children Board Regulations (otherwise he would be automatically required to be on the payroll under the current legislation). The agency contracts with Charlie’s PSC. The agency checks HMRC’s new tool to see what the tax position is and finds that the off-payroll rules apply.
The agency must deduct tax and NIC on the payments it makes to Charlie’s company. Charlie’s PSC charges the agency £1,500 per month for his services. Charlie’s company is not registered for VAT. The agency treats £1,500 as Charlie’s earnings and deducts £123 tax and £99 employee NICs. It accounts for this via RTI and pays the tax and employee NICs to HMRC along with £114 employers’ NIC. Charlie’s PSC receives £1,278*.
Charlie receives a credit against employment and dividend income drawn out of his PSC so he does not pay tax twice. The corporation tax liabilities of his PSC will remain unchanged by the measure.
*For simplicity, the examples do not include 5% fixed expenses.
Detailed proposals will be published in a consultation document before the summer when views will be invited on the following points:
- the definition of the public sector for the purposes of these changes and impacts on specific groups;
- the development of the new test and tools for determining whether an engagement should be considered employment for the purposes of employment taxes; and
- how the 5% fixed expense deduction would work with the new rules.
Following consultation, the government will introduce the legislative changes in Finance Bill 2017.
At face value these new proposed measures make grim reading for those contractors affected as they are left out of the decision making process and appear impotent in this respect. However, given the fact that freelancers play an important role in providing much needed services to the public sector and that an organisations’ costs will be driven up by the requirement to pay employers’ NIC, then will these organisations be more keen to ensure that self-employed status is preserved? Particularly in a time where departmental budgets are either being cut or squeezed, then there may be an opportunity to bring all the relevant parties to the table before the start of an engagement to ensure that everyone is singing off the same hymn sheet or is this just sheer fantasy!
This is completely ridiculous, you are saying they are now an employee, but have still to charge VAT if they are registered, and that Corporation tax would still apply to their Service company. This sounds like a back door change to company law, without due discussion and debate in parliament. Insufficient research into the subject by George Osborne or his department, just the usual knee-jerk response. Maybe when he takes realistic Corporation Tax off of the likes of Google and Starbucks and closes the door on the Irish fiddle, then he can come back to this.
I don’t understand why they think corporation tax is still applicable? If I have to pay PAYE and NICs upfront then wouldn’t it just make sense to pay myself everything as salary rather than dividends. Salary is a deductible expenses so no profit for corporation tax, right? What am I missing here?
But why would anyone work as a contractor in public sector where the wages are far below private now and where you have to work as an employee but get no benefits of an employee ..like no job security, sick pay ets
My question is what if you put most of your income into a private pension ?
And do you still have to do company accounts and incur accountant fees etc
This pure madness …not worth it for anyone with top skills
The likelihood is no contractor will do business with the public sector as it will no longer be financially beneficial to do so. This will result in a skills drain for the public sector and an increase in labour in the private sector. Due to the law of supply and demand this will push private sector rates down and reduce tax receipts. Simply put Mr Osborne is an Idiot!
No-one in their right mind would do Government contract work after Apr 17. It’s got zero hours contract written all over it with the added benefit of a pay cut! Osborne’s mates at Accidenture then pick up the work and eventually the public will have them as a hate figure instead of us lot.
Looks like a back door for employers to put in place zero hours contracts .. expect to see an increase in people being employed under these rules, and a reduction in the number of employed roles. Hence the employer avoids all of the additional expenses, risk of sickness and poor performance, costs of paid leave etc. etc.
If contractors are employees will they have any employment rights and benefits
Presumably employer will pay all expenses and provide IT equipment
What about public liability?
Complex and confusing .. we need to revisit outdated definitions of employment and self employment rather than retrofit solutions
This is actually the latest in a line of attacks on the whole public sector temporary workforce supply chain which I believe is intended to disrupt the flow of direct contractors and force big projects / departments down the outsource route. After all what better way to justify outsourcing than telling the public they couldn’t find any people to work for them? Great news for ATOS, Fujitsu, Capita et al. Bad news for contractors and the tax payer.
Bye bye public sector and bye bye UK contracting when this stupidity rolls over to the private sector as it soon will.
This will destroy the contract market and reduce revenues. Choke on it Osborne, you tool.
Just watch all the projects in the public sector ground to a halt! George Osborne you twat! I’m so glad I came out of working on Public Sector contracts. I defiantly won’t be going back! If i’m expected to pay at source, why would I want to collect VAT for the Government?? Get the tax laws right an tax the bigger companies that do the dodging, not us contractors that prop you up and just want to earn a decent wage to provide for ourselves and families. Just grow up and live in the real world.
In both these examples the deductions from the invoice only include the employee deductions. The employers NIC appears to be a supplementary payment paid by either the client (Example 1) or the agency (example 2) which would be passed onto the client in any case.
The client is effectively footing the bill for a permanent employee with a contract salary – why would they do that? How would that fit into their salary grading?
Would the contractor get the matched employer pension contribution? Is an employee pension contribution mandatory? That sort of thing is built into payroll systems.
My thoughts:
– Many public sector companies have negotiated very low 3rd party agency rates, who now won’t have enough margin to implement and fund this change, so they will have to increase rates and costs.
– This assumes all contractors ‘take’ money they earn as PAYE in a year, most leave funds in business accounts for contract breaks, sickness, pension, insurance costs, training etc
– Public sector companies use contractors to help create a flexible team and to bring knowledge into the organization, this will cause stagnation and internal people being stretched beyond their capabilities
– Nowadays it is somewhat impossible to differentiate between project and business as usual as they companies are constantly in change.
– Resources from big consulting companies will come in via a service agreement at extortionate costs!
Ultimetly this will drain much of the public service of a hard working, credible, intelligent and flexible workforce.
– Finally, who will implement and manage the work required to make these changes by 2017? Contactors? Hmmmmmm
What a stitch up! I am one of 42 contractors within our organisation. we have been putting in place new systems, departments and do the role of two public sector employees who by the way wouldn’t do the job! next year we will be all pulling out, so good luck my organisation you are going to need it. Or will they pay one of the big four millions to do what we do at a fraction of the cost! Osbourne is a myopic idiot
Will we simply end up with the agencies going via off shore companies who do not have to comply with these new rules. Who then hire contractors for these rules.
Therefore we will end up working for offshore companies on shore.
Well , Simply Grace and Charlie in the examples above will be earning less money working than other people on benefits !!!! What is this government up to is a mystery to me
To sum up agency is dead with IR35 i have increased my working hours from £30 an hour to £50 an hour to compensate myself for pension and insurance etc.
Well done government your now paying for my services !
regards
I am thinking of setting up my own recruitment agency and approach schools for supply work through a recruitment consultant that the agency employees on a self employed basis. The way I see it because anyone working for the supply agency could potential go and carryout the work the whole fee would not be subjected to IR35. However the wages(minimum wage) that I get paid as a teacher/employee would be subjected to TAX and NI when I work due to IR35. The difference I would get as a director of a recruitment agency.