IR35: On and off the payroll

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Kate Upcraft
Owner
Kate Upcraft Consultancy Ltd
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Kate Upcraft addresses the challenges of getting the payee onto the payroll of the public sector body, which needs to pay the worker while complying with IR35.

Just before Christmas David Kirk produced four excellent articles on the new off-payroll rules for public sector contracts. I particularly enjoyed the homage to The Hitchhiker’s Guide to the Galaxy, as I believe we need the insight of the late Douglas Adams to make sense of some of legislative changes we are facing this year.

Practical points

My concern is the practical aspects of the challenges facing public sector bodies (PSBs), agents and employment agencies, who need to set up and pay a new category of “deemed workers”, in order to pay the individuals/personal service companies. The problem is: We currently have no concept of “deemed workers” on payroll systems.

Small PSBs in the dark

Large PSBs may be well aware of the changes from 6 April 2017, and will have the resources to put in place new payroll processes. But the smaller end of the public sector may not be familiar with the changes, for example; doctors, dentists and schools.

Many of these smaller organisations may outsource their payroll, meaning they are one step removed from the legislative change. However, as the initial IR35 status decisions, and the information gathering responsibilities, rest firmly with the PSB, tax agents must to consider what their clients need to understand. Employment agencies and payroll bureaus need to address how their own payroll teams will cope with this new class of payee.

New information

Once the PSB has taken the decision that the personal service company (PSC) is caught by the IR35 rules, a version of the employee starter checklist will be needed to capture the minimum information required to set up a payroll record, to enable the net fees to be processed for tax and NI. Whoever is processing the payroll needs as a minimum; name, NINO or two lines of the address, date of birth and gender. None of this information may be obvious from the normal invoice that would be presented by the PSC to the hirer.

It may also be the case that the agent’s normal contact at the PSB for payroll purposes may not be the same person who deals with issues around deemed workers. This person may not be used to the detail and deadlines needed for payroll processing.

To process the payment through the payroll you will need the net amount of the fee (ex-VAT and any allowable business expenses – not the notional 5% as that is disallowed). The deemed worker’s NI status is also important. While many deemed workers will be on table letter A, one can envisage both table letter M for under 21s, and table letter C being an appropriate response, based on the worker’s date of birth.

Exclusions

Once the payroll record for the deemed worker is set up, you will need to ensure that the individual is excluded from auto enrolment processing and any statutory payments. It is hard though to envisage the right data reaching payroll to trigger a statutory payment, other than possibly sick pay.

On your version of the starter checklist don’t ask the PSC for any student loan related information, as student loan repayments will still be collected via the PSC. Thus, if an SL1 arrives from HMRC in response to the FPS reaching HMRC, you can ignore it.

Separate payroll

It may be that the PSB will want the deemed worker in a separate cost centre or payroll group. This will keep their costs in respect of the tax and NI, distinct from the costs of true employees. This separation needs to be agreed before April 2017, so that costing reports can be correctly set up.

Equally as the remittance to HMRC needs to include the tax, NI and apprenticeship levy on the deemed worker’s earnings, that too may be a matter for discussion with the PSB as to who needs to be informed of the cost implications.

Apprenticeship levy

If the PSB’s payroll is large enough to pay the levy (greater than £3m), the leadership team may not have realised that the deemed workers will inflate their levy costs. Equally, if you are processing payroll for an employment agency who supplies deemed workers to a PSB, that agency will want to take the levy into account in their charging model.

Leaver

At the end of the assignment the deemed worker will need a form P45, indicating the deemed earnings that have been taxed.

Replies

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10th Jan 2017 12:56

Madness.

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10th Jan 2017 17:17

Unbelievable, unworkable, insane madness

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10th Jan 2017 15:08

Unworkable madness

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10th Jan 2017 15:21

Insanity (just for the variety of words)

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11th Jan 2017 10:33

How can any deduction (student loan) be the responsibility of the PSC since it will have no income for the worker. All payments, other than VAT will be net salary to the worker? There will be no money in the PSC to pay anything, running costs included?

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11th Jan 2017 12:53

Talking of practical aspects and confusion (mine)....from what I've read, if a Freelancer with a PSC is caught by this new rule, and invoices/earns £60k, they'll end up with a deemed salary of about £60k (gross) paid by the Public body or Agency - and a P60 issued by the Public body/Agency showing £60k salary to put on their Self Assessment Tax Return.

Then, the guidance seems to say the PSC gets a deduction of the PAYE/E'ees NI already paid by the Public body/Agency when working out what PAYE/NI is due to HMRC through RTI. So this implies a payroll is being run by the PSC - presumably leading to another P60 of (say) nearly £60k?

Obviously one can't put two P60's showing pay of £60k on a Self Assessment Tax Return - when the PSC only invoiced for £60k, so I'm missing something.

Does/can the freelancer just take the net deemed salary amount from their PSC as net salary without the need for their PSC to actually run a payroll?
But then what would show in the PSC's accounts as a cost? Is it the deemed salary calculated by the Public body/Agency? Or don't we know yet?

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By vstrad
11th Jan 2017 13:53

Doesn't the PSB need to know about any other employments the worker has? If he is part-time for the PSB he will no doubt be getting a salary from the PSC and paying NI. Presumably the payment goes to the worker's bank account, not the PSC's bank account. How is VAT dealt with?

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to vstrad
11th Jan 2017 14:22

The PSC receives the net deemed salary plus VAT. This "belongs" to the PSC as it is their billed income and must partially settle the debt sat in its books. The hard part then comes for the freelancer when they try to extract income. If they take it as salary, it will need to go through RTI. HMRC stated in a seminar I was at that RTI wasn't changing, so presumably the worker is taxed twice in real time and needs to claim the double taxation back on their SA return. I can't see this working in practice...

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to dlaing100
11th Jan 2017 18:24

The technical guidance for off payroll workers advises that a payroll will need to be run for the PSC to ensure that the director still gets credit for state pension etc but that no tax/in will be deducted to avoid double taxation - it does not say how this work though.

It also intimates that there will be no employers nic but not actually in black and white.

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By vstrad
to dlaing100
12th Jan 2017 17:14

Many thanks for that useful information. Many workers will be working for more than one engager and getting a salary from the PSC, often having incomes > £982pw (or rather, the 2017 equivalent). What will happen if they submit form CA72A to defer their NI? Are PSBs ready to cope with all this?

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12th Jan 2017 15:11

And in terms of Employment law, placing someone on the payroll might trigger a liability to holiday pay, redundancy and employment rights depending on the length of the contract??

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to matabele
12th Jan 2017 18:29

The guidance and this article confirms that no entitlement will arise from payrolling the payment. All benefits will continue to be generated through the PSC

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By vstrad
to Ellabobbin
13th Jan 2017 18:13

Ellabobbin wrote:

The guidance and this article confirms that no entitlement will arise from payrolling the payment. All benefits will continue to be generated through the PSC


Guidance is only guidance - what does the legislation say?
The tests for IR35 are based on the employment law concepts of control, personal service, etc, so if a worker is caught by IR35 there is a very good chance an Employment Tribunal would find he was entitled to the benefits accorded to an employee. After all, disguised employment must be employment, right?
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By cfield
12th Jan 2017 15:28

One of my contractor clients works for TFL and they've just told all their off-payroll workers that they won't be dealing with personal service companies any more, so their only option is to join the payroll (at terrible rates), go to an umbrella company (and pay the employer NI) or leave.

I can see many other PSBs doing the same and there will be a mass exodus of contract staff from the public sector. I just hope this doesn't have implications for the NHS. It's under enough strain as it is.

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12th Jan 2017 20:13

One of our clients, a contractor, works for one of the large central government departments. They have just told him - not to worry, they may have to put him inside IR35 for technical/process reasons but will just up his rate to offset any loss to him. Truly this is ridiculous.

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