Arguably these proposed changes coming in from April 2017 are bigger than the introduction of IR35 in 2000. Sixteen years on and it now looks as though HMRC have a piece of legislation that will do what HMRC hoped IR35 would do all those years ago namely; stop incorporation being a means of achieving a PAYE and NIC advantage compared to a directly employed individual undertaking the same role.
Workers engaged in the public sector via their own Personal Service Company (PSC), will have their employment status reviewed by the public sector end client on the outset of the contract to determine whether it falls within the new provisions.
The new provisions apply when the following are met:
1. the worker personally performs services, or is under obligation to personally perform services for the end client
2. the end client is a public authority
3. the services are provided under circumstances where, if the contract had been directly with the end client, the worker would be regarded for income tax purposes as an employee of the client or the holder of an office with the client, or the worker actually is an office holder with the client
Part three of the above provisions essentially requires the public body to consider the employment status of the PSC. In order to assist with this HMRC are developing an online tool that will help the public body determine the PSC status.
Clearly a key part of the application of the provisions will depend on what is considered to be a public body. The technical note issued by HMRC confirms that any organisation required to comply with the freedom of information act (http://www.legislation.gov.uk/ukpga/2000/36/contents) is considered to be a public body for the purposes of the new provisions.
If the PSC contracts directly with the end client, then the end client must deduct PAYE and Class 1 national insurance from the payments made to the PSC based on the VAT exclusive amount. Additionally, if the PSC is caught by the new rules, they are no longer allowed the 5% company costs deduction allowable under a normal IR35 deemed payment calculation.
If there is an intermediary in the contract between the public body and the PSC, such as an agency, the agency as the PSC’s ‘fee payer’ will be responsible for deducting the PAYE and NIC due. The public body will still be responsible for determining if the legislation applies and will need to advise the fee payer that it does so, to ensure the fee payer makes the appropriate deductions.
Whoever is responsible for deducting the amounts from the PSC, will also be required to ensure that the deductions are included in the fee payers RTI filings, and issuing P45 to the worker at the end of the contract.
The worker/PSC will be obliged to provide all relevant personal details to enable the fee payer to report the payments and make the correct deductions. This information will include:
• Personal details such as name and address information;
• National Insurance Number
• Tax code
The payment will count as part of the fee payers wage bill for apprenticeship levy and employment allowance purposes, but will not result in any requirements under auto-enrolment, payrolling benefits or statutory payments for the worker.
At the end of the tax year, any contract caught by the new off-payroll rules is disregarded calculating any IR35 deemed employment payment due for the PSC. This ensures the worker will not pay tax and NICs twice on the same income.
The worker will need to include the income from the caught engagements in the employment income section in their self-assessment tax return.
Long Term Impact
Reading the Autumn Statement documentation, HMRC would have you believe that the new provisions are only intended to be implemented within the public sector. Having reviewed the structure of the new online tool HMRC are designing, it’s generic enough to be rolled out to the private sector at a later date.
Given the lack of tax receipts IR35 has generated in the private sector over the last sixteen years, it’s not too much of a leap to see HMRC bringing this in to the private sector once the government has had the chance to get its own house in order, and those advising PSC in the private sector or end clients and agencies using the services of PSC’s should be reviewing their use in light of changes which will almost inevitably be brought in.