The start of a new tax year and the start of the new off-payroll legislation for workers in the public services…

Fri 05 May 2017

6 April has introduced a number of changes in the employment tax arena including new legislation in public services which means that intermediaries (agencies mainly) or public sector bodies will be responsible for deducting the income tax and NICs from payments made to public sector workers who provide services via a personal service company (“PSC”) – the Government believes that public sector bodies have a duty to ensure that those who work for them pay the right amount of tax. It’s estimated that non-compliance in the UK will cost the Exchequer £440m in tax year 2016 /17.

HMRC has published an ‘off-payroll’ working in the public sector web page providing guidance for ‘fee-payers’ (the public authority, agency, or other third party paying the intermediary ), PSCs and public authorities, to support the practical application of the legislation. It also provides a link to the new Employment Status Service (ESS) tool which can be used to determine the employment status of a worker.

So, who is responsible for what?

Fee-payer

• Operating employment taxes associated with the contract;
• Paying the PSC after having calculated the deemed payment;
• Reporting to HMRC through Real Time Information (RTI); and
• Paying employers’ NICs.

Note that Apprenticeship Levy applies to any person who must pay employer NICs and will therefore apply. Employment Allowance is also triggered by the payment of employers’ NICs. However, statutory payments and other employment rights, including pensions auto-enrolment, will be unaffected.

Public authority

• Determine whether off-payroll working legislation applies from the outset of the engagement and when there are subsequent contractual changes;
• Notify agencies if the off-payroll working rules should apply to the contract with the worker; and
• Where the public authority doesn’t reply to a written request from a fee-payer as to whether the off-payroll rules apply within 31 days, taking direct responsibility for PAYE and NICs as if it were the fee-payer.

Workers providing their services through PSC or intermediary

• Provide the fee-payer with the information required to determine whether the off-payroll working legislation should apply;
• Where the off-payroll working legislation applies, provide the fee-payer with the information required to enable them to deduct tax and NICs from the payment they make to the intermediary; and
• Report to HMRC on their own, and the company’s tax affairs.

Note that the reform applies to payments made on or after 6 April 2017, including payments made for contracts entered into before that date. Where work is completed before 6 April 2017 but the payment is made on or after 6 April 2017, the rules will still apply.

Employment Status Service (ESS) tool

Whilst not mandatory, the tool has been developed to support in determining the employment status of a worker, and to demonstrate that the public authority has taken ‘reasonable care’.  However, it has been heavily criticised:

• The output is subjective and is only as reliable as the information provided by the person using the tool. Therefore, it’s important that the person responsible knows the roles and responsibilities of the worker in order to answer the questions in terms of ‘what happens in practice’, rather than what the contract states;
• The tool has no legal authority and HMRC has confirmed that in an employer compliance review, it wants to understand how the decision has been made and to see evidence to support the thought process. However, there is no clarity yet as to HMRC’s position where its view differs from that of the public authority.
• The use of the tool doesn’t constitute ‘reasonable care’ being taken, the thought process in arriving at the correct decision is important.

Penalties for not following IR35 rules

HMRC’s guidance discusses penalties for not following IR35 rules for workers and states that ‘there can be significant consequences if you, your intermediary, or client ignore IR35 legislation. Interest and penalties can be charged on any extra tax and National Insurance contributions that are owed. Penalties can be more severe if it can be proved that IR35 rules or legislation have been deliberately ignored’.

At the same time, there is an opportunity to make good any unpaid taxes for previous years ‘If IR35 legislation applied to previous contracts that you worked on but wasn’t complied with, you should tell HM Revenue and Customs (HMRC) immediately. If you make a voluntary disclosure it may reduce any penalties you have to pay’. 

However, from 6 April, the responsibility for determining the correct employment status rests with the pubic authority and therefore, any non-compliance will either rest with the fee-payer or the public authority, as will any penalties, and ‘making good’ the PAYE/ NICs which should have been withheld.  HMRC has set up a team of employment status specialists who will be responsible for ensuring compliance with this legislation.

Next steps

This is both new legislation and complex due to the subjectivity of the responses which formulate the employment status decisions.  Please contact Vaneeta Khurana or your local Mazars contact if you require any additional guidance.