In the Autumn Statement, the Government confirmed that it will reform the intermediaries legislation, often known as IR35. The intermediaries legislation ensures that individuals who provide their services to clients through their own company (or other intermediary) pay employment taxes in a similar way to employees where, had they provided the services direct to the clients, they would have been employees of their clients.
The Government has now published a technical note and draft legislation, which set out how off-payroll working in the public sector will operate where payments are made to workers supplied by such intermediaries. In summary, the public authority will, now, become responsible for deducting from payments made to the intermediaries, and paying to HM Revenue & Customs, employment taxes and National Insurance contributions (NICs).
What is a public authority?
A public authority means a public authority for the purposes of the Freedom of Information Act 2000. This covers Government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the NHS.
When does it start to apply?
The new legislation will apply to payments made on or after 6 April 2017. This means that it may apply to contracts entered into before that date even if the contract has been terminated before then; if work is completed before 6 April 2017 but payment is made on or after 6 April 2017, it will be caught by the new legislation.
What will public sector bodies have to do?
Public authorities will have to inform the intermediary either that the contract falls within the new off-payroll rules or that it does not. This can be done in the contract where the parties enter into a new contract.
Public authorities will have to comply with PAYE obligations in respect of payments made to intermediaries on or after 6 April 2017, in circumstances where a worker is required personally to perform services under a contract between the public authority and the intermediary.
Specifically, this means that public sector bodies will have to:
- review all contracts with intermediaries and notify them whether the new rules apply or not;
- if the rules do apply. deduct income tax and employees' NICs from the payment and account for them to HMRC;
- pay the balance to the intermediary; and
- account for employer's NICs and, if applicable, the apprenticeship levy.
Accordingly, this will not merely give rise to compliance obligations (and costs where the new legislation is incorrectly applied) but also additional costs in the form of employer’s NICs. Note that statutory payments, stakeholder pensions and other employment rights are not affected by the new legislation.
How do I know if an engagement is covered?
A new online and interactive employment status service provided by HMRC will help people decide whether the new rules apply. This is being tested privately and a version will be made public for testing before the new rules come into force.
What do I need to do now?
Employers in the public sector may be financially worse off, as they will have to pay employers' NICs in respect of some off-payroll contractors and may also have to pay the apprenticeship levy in respect of them (depending on the employer's size), which they would not have budgeted for when they entered into the contract. Public sector employers should therefore review relevant contracts to see if they can be renegotiated. In relation to new engagements, public authorities should consider whether the additional costs can be reflected in the terms of engagement or whether the worker should be employed directly, although that would mean the worker having statutory employment rights.
Where can I find further information?
HMRC has published technical guidance, which includes a number of case studies. It is available here.
What about private sector employers?
The new legislation will only apply to the public sector but it is likely to be extended to the private sector at some stage so employers in the private sector need to be aware of it too.