New financial year = new tax burden for public authorities
Wednesday, 5th April 2017
On 6 April 2017 changes to IR35 came into effect which specifically affect public sector bodies.
These changes are worth noting as they will have quite a significant impact on public sector bodies.
IR35, or the "intermediaries legislation", is a set of rules which apply when someone (a "Worker") is contracted to work for a "Client" through an intermediary such as their own service company (an "Intermediary").
This is a popular business structure, as it allows the Worker to draw dividends from the Intermediary, rather than a salary, and thereby pay less tax and national insurance.
The rules essentially say that, where there is "disguised employment" in the working relationship, the Intermediary will be responsible for operating tax and National Insurance contributions on the payments it makes to the Worker.
The "disguised employment" principle applies where, if you ignore the Intermediary, there is actually an employment relationship between the Client and the Worker. HMRC assesses whether there is disguised employment by considering the whole working relationship, looking at issues such as the mutuality of obligation (and whether or not there is a genuine right of substitution), the degree of control exercised by the Client, and whether or not the Intermediary has other clients.
Public Sector Responsibility
Public authorities should be aware that, as from 6 April 2017, the rules have changed within the public sector, such that responsibility for deciding whether IR35 applies, and therefore whether tax and National Insurance contributions need to be made, shifts from the Intermediary to the public sector Client.
The practical implication of this is that, if a public authority hires off-payroll workers through an Intermediary arrangement that is caught by the "disguised employment" rules, the public authority itself will now have to calculate the tax and National Insurance contributions payable on these contracts, make those deductions from the fee paid to the Intermediary, and then make the appropriate payment to HMRC.
Notifying the Intermediary
Timing is pretty crucial when it comes to the IR35 reforms. If a public authority currently already has contracts in place that fall under IR35, they must notify the Intermediary as to whether the off-payroll rules apply before the first payment that is made to them on or after 6 April 2017.
In the case of new contracts that the public authority intends to enter into, notification to the intermediary should take place before entering into the contract.
There are several steps and tools that public authorities can engage with to ensure that they are complying with the new rules:
- inform the appropriate teams - it is not just the payroll teams that will need to be briefed on the changes. Hiring teams, procurement teams and accounts teams are some examples of others who will need to be aware of the changes in order to carry out their day-to-day jobs;
- HMRC has published various guidance papers about the reforms for public authorities. These are easily accessible online at www.gov.uk/government/publications; and
- if in doubt about whether any contractors are in fact "disguised employees" caught by IR35, public authorities can use the Employment Status Service tool (again, available online) which provides HMRC's view of whether the rules are applicable in any given case.