New PAYE and NIC rules for ‘off-payroll’ workers in public sector confirmed
29 November 2016
In May 2016, the Government published a consultation paper outlining proposals to amend the IR35 legislation for workers who provide services, via a personal services company (“PSC”), to a public sector engager, whether directly or through a third party (such as an employment agency or outsourcing firm).
In May 2016, the Government published a consultation paper outlining proposals to amend the IR35 legislation for workers who provide services, via a personal services company (“PSC”), to a public sector engager, whether directly or through a third party (such as an employment agency or outsourcing firm). The paper proposed that the person paying the PSC should generally be required to operate Pay As You Earn (“PAYE”) and pay National Insurance Contributions (“NICs”) on the fees that it pays to the PSC. The Chancellor, in his Autumn Statement, has now confirmed that these changes will take effect from 6 April 2017.
There are a number of reasons why workers may choose to supply their services through a PSC (that is, a company controlled and owned by the worker). The primary commercial advantage is that the PSC gives the worker protection of limited liability. From a tax perspective, depending on the circumstances, it currently may be possible for the worker to make a tax saving by paying himself primarily by way of dividend rather than salary. Unlike salary, dividends are not subject to employee or employer NICs. In addition, a 45% taxpayer will currently pay tax at an effective rate of 38.1% on dividends in excess of £5,000.
Some years ago, HM Revenue & Customs (“HMRC”) became concerned by the perceived loss of tax through the use of PSCs and introduced the anti-avoidance legislation known as IR35. In broad terms, IR35 applies where the worker personally provides services to a client and:
- ignoring the existence of the intermediary, the worker would be an employee or office-holder (e.g. director) of the client; or
- the worker is an officeholder and the services he provides through the intermediary relate to that office.
Where IR35 applies, the PSC is required to operate PAYE and NICs on deemed employment income (broadly, the fees received by the PSC less certain permitted expenses). Under the current law current law, a person engaging a PSC will not have any PAYE or NICs liabilities in relation to that arrangement provided there is a valid contact between the parties and the parties act in accordance with that contract.
This will all change from 6 April 2017 for the public sector. For these purposes, the public sector broadly comprises government departments, executive agencies and non-departmental public bodies, the NHS, local, police and fire authorities, universities and other educational establishments, the BBC and Channel 4.
Under the new rules, the public sector engager (or, the third party if one is involved) will be responsible for deciding whether IR35 applies and, if it does, for calculating, reporting and paying tax and employee and employer NICs to HMRC on the fees paid to the PSC (exclusive of VAT).
The consultation paper set out a simplified process for determining whether IR35 applies for these purposes. It was proposed that, unless 20% or more of the contract was for materials consumed in the service, a worker would be within the scope of the new rules if:
- the worker is required to do the work themselves; and
- the engager decides or has the right to decide how the work should be done.
If the answer to either of these questions is no, it was proposed that the engager would use an interactive, digital tool (similar to the employment status indicator) to obtain a real-time, definitive HMRC view on whether a particular engagement was subject to the new rules.
Given the fundamental change in approach, it was hoped that implementation would be delayed until 2018 while the detail of the rules was worked out and the digital tool was developed. A number of responses to the consultation raised concerns about the lack of detail and the “broad-brush” approach that was being proposed to determine whether a worker was caught by the new rules.
Despite this, the Chancellor’s announcement means that public sector bodies (and third parties where relevant) should begin preparing for the new rules. Initial steps include:
- Identifying contracts with PSCs.
- Determining whether the new rules will potentially apply to those contracts.
- Setting up, say, six-monthly reviews of all contracts with PSCs to ascertain whether there has been any change in circumstances.
- Ensuring that payroll and other systems will be able to cope with the changes.
- Considering whether any changes to the contracts are necessary, e.g. to ensure that the engager can obtain the information from the relevant parties to determine whether the new rules apply.
- Renegotiating contracts where appropriate.
Another thing to consider is how to deal with the additional employer NICs costs and whether these should and can be passed on to the PSC. At least in the short term, this is likely to make it harder to hire consultants for the public sector. In the longer term, HMRC’s policy seem to be moving in a direction where, regardless of the arrangements under which a worker provides his or her services and the worker’s status for employment law purposes, PAYE and employee and employer NICs will need to be operated. Accordingly, it is anticipated that these rules will be applied to the private sector in due course.