Much has been written about employer readiness for off-payroll working within the public sector. However, it isn’t simply the employer, their agents or software developers that have needed to adapt their systems and processes to be ready for when the public sector engager and fee payers begin to consider whether the contracts and subsequent payments are captured by intermediaries legislation (IR35).
From 6 April a further responsibility was placed upon:
- Public authorities who hire off-payroll contractors
- Agencies and third parties who supply contractors to the public sector
- Contractors who provide their services to a public authority through an intermediary
The new rules will see the responsibility for assessing whether a contract for services is caught by intermediaries legislation (IR35) pass from the contractor providing the services to the public sector engager.
The new regime will impact all payments made from 6 April, regardless of whether the work was completed before then.
Where it is deemed that an engagement is caught by the rules, the fee payer will become the ‘employer’ for the purposes of collecting income tax and Class 1 National Insurance contributions (NIC). The payment will be processed for income tax and NIC deductions using the payroll system and details of the worker will be submitted to HMRC using the Full Payment Submission (FPS).
In the meantime, in another part of HMRC, processes continue regarding the collection of Student Loan (SL) repayments.
Has it really been almost a year since employers first began to receive employer prompts and nudges from HMRC via the Generic Notification Service (GNS)? This process looks to inform the employer that, according to HMRC records, they are employing a ‘borrower’, have been issued with an SL1 start notice and should therefore be making deductions for student loans.
Setting aside the fact that there could be a couple of very valid reasons for not appearing to have activated the SL1 (by not making a deduction) – such as when a priority pay attachment is already in operation, the employer prompt is not an order to begin making deductions, it is simply a prompt to highlight where HMRC systems believe an employer may not be carrying out their obligations correctly.
This is a fully automated process and is the first time the Student Loans team have really begun to feel the benefit of payroll data being submitted in real time, and we look forward to the time when reconciliation between HMRC and the Student Loan Company can also be carried out in real time – an action that we would hope will benefit borrowers enormously.
Either way the employer prompt process, once activated, is carried as follows:
An employee’s details are matched within HMRC systems and are identified as being an SL ‘borrower’ at this time a form SL1 is issued to the employer to initiate a start of student loan repayment, where earnings exceed the threshold.
Following receipt of the first FPS submitted by the employer following the issue of the SL1, if no student loan deduction has been made an email prompt is issued via the generic notification service (GNS) – a service that is also used to notify an employer where late filing of RTI returns appears to have occurred. It is, if you will allow me to be creative, a ‘call to action’.
In the event that nothing appears to change for that borrower (or borrowers) in the following FPS submission, then a further prompt is issued – a second ‘call to action’.
Following the two email reminders, if still no change is noted on the following FPS submitted, then further action is taken by way of a telephone call, and it is at this point HMRC and the employer get an opportunity to discuss what part of the process has ‘fallen down’.
Early findings from 2016 suggest that there are a variety of reasons that have caused the prompts to be issued, the main one being that employers don’t know that they have received an electronic Start Notice (SL1), which highlights the continued need to ensure that digital awareness amongst the employer community is as robust as it needs to be.
This is particularly concerning as HMRC heads ever onwards with their journey to ‘Make Tax Digital’.
Student loans and the off-payroll fee payer
So what does this have to do with the fee payer (public authority, agency or other third party)?
As from 6 April 2017, where the engagement is deemed to be captured by intermediaries legislation (more commonly referred to as IR35), the fee payer is deemed to be the employer for income tax and Class 1 NICs purposes. Any contractual payments made to the worker must be net of employment tax (PAYE) and Class 1 primary NICs.
There is no requirement to make deductions for student loan repayments from the payments made. The contractor caught under IR35 is responsible for accounting for their student loan repayments when they submit their self assessment (SA) return, and it is via SA that they account annually for repayment on their earnings (where applicable).
Unfortunately HMRC systems currently have no way of recognising where an individual who is detailed on the FPS is an employee or a worker caught by IR35. Furthermore HMRC is unable to inhibit an automated SL1 notice from being issued to a fee payer instructing them to commence student loan deductions in respect of this worker.
If a fee payer receives an automated SL1 for a worker who is being taxed under the new regime, they are being asked by HMRC to ignore this notice and to not begin to deduct student loan repayments from the worker’s fees and, where student loan deductions have already been deducted, to stop from the next available pay date.
This is not something that an automated payroll system will easily adapt to and so affected ‘employers’ will need to build in to their processes, where possible, a method to prevent these repayments from starting. In the event that they can’t, the payment will be credited against the worker’s Student Loan Company account. Meanwhile the worker should continue to account for student loan repayments via their Self-Assessment Tax Return.
Where an SL1 has been issued, and the public authority (or the agency serving the authority) has been able to prevent SL repayments from being made, they will begin to receive, from HMRC, reminder emails via the Generic Notification Service (GNS). The employer prompt and ‘call to action’ will begin – at least for the 2017-18 tax year.
As each tax year passes the time made available for employers, bureaux, agents and software developers to adapt processes and systems to comply with the ever increasing raft of new tax policies and changes diminishes. And whilst on this occasion HMRC has been able to design a new digital tool to aid public sector engagers, agencies and contractors in the decision making process it appears that on this occasion they too have been caught out with the limited rollout time made available for these reforms.