Revision of the Intermediaries Legislation for the Public Sector
Last year, HMRC published a discussion document on improving the effectiveness of the intermediaries’ legislation (IR35). This has now been followed by a consultation document issued on 26 May with an end date of 18 August.
The proposal in the consultation document is that the Government will reform the intermediaries’ rules for ‘off-payroll’ engagements of workers who operate through an intermediary, such as their own limited company, in the public sector. This includes engagements through third parties such as employment agencies, outsourcing companies and consultancy firms who supply workers.
From April 2017, where workers are engaged through their own personal service company (PSC), responsibility to apply the intermediaries’ rules will fall to the public sector body, agency or other third party paying the worker’s company and the payer will be liable to pay any associated income tax and National Insurance.
The proposals mean that where an individual provides services to a public sector engager through a PSC and is doing a similar job in a similar manner to an employee, both they and their engager will be required to pay broadly the same tax and National Insurance as if they were an employee.
The Government intends to use the definition of ‘public sector’ set out in the Freedom of Information Acts. This covers organisations such as: Government departments, executive agencies and non-departmental public bodies, NHS, police and fire authorities, local authorities, devolved administrations and educational establishments.
The Government proposes to introduce a new two stage process to quickly decide whether the rules need to be considered. Firstly, the end-engager will remove those ‘business to business’ relationships that are not within scope of the rules and they do not need to take any further action. Otherwise, the engager will need to move on to consider two simple questions for the second part of the process. They are:
- Right to personal service – is the worker required to do the job themselves?
- Control – Does the engager decide or have the right to decide how the work should be done?
These questions are based on the current employment status tests. If the answer to both questions is ‘yes’, the worker is in scope for the off-payroll rules and the engager will need to account for tax and National Insurance on their payments to that worker’s PSC. If the engager is unable to answer ‘yes’ to both questions, they will need to use the digital tool.
HMRC is developing a new digital tool which draws on the experience users had of the Employment Status Indicator (ESI) but will be tailored to the specific needs of engagers in determining whether the off-payroll rules apply.
Any new rules will not come into effect until next April, but early planning is strongly recommended. Most public sector bodies will be affected by these new rules, so please do speak to one of our Employment Taxes specialists (details below) about how we can help you to manage these significant changes.