Kate Upcraft examines how employers should report fees paid to contractors who are within IR35 for contracts in the public sector.
The focus on the IR35 (off-payroll) reforms for the public sector has been around the initial assessment of the nature of the contract between the personal service company (PSC) and the public sector body (PSB). However, once the decision is made that the contract falls within IR35, rightly or wrongly, there is that the small matter of reporting the appropriate fees to HMRC, and withholding the correct amount of tax and NI.
What is correct procedure?
I have been trying to establish the correct operational process for deemed workers under the off-payroll working rules for nearly six months now. I’m pleased to report that I have had a response from the HMRC off-payroll team; it’s good to be in dialogue with them after a very long period of radio silence.
The guidance for the off-payroll working rules for public authorities was reissued on 7 July 2017. The original guidance, some of which was published in 2016, had two different instructions in respect of the correct tax code to be allocated to the deemed worker by the fee payer. Some parts of the guidance indicated that the code should be BR, whilst other sections indicated 0T (not 0T/1, which is the standard new starter tax code in certain circumstances). It also wasn’t clear whether a P45 could be used if provided by the PSC.
The HMRC policy team has now confirmed that:
- in the unusual event that the PSC presents a current P45 then the code and previous pay and tax details reported on that P45 should be used;
- if the PSC does not present a P45, the PSB should allocate tax code BR and select starter declaration C - tax code 0T/1 should not be used.
NI table letter
The examples in this technical note use table letter A for illustration purposes, but the same assessment of the appropriate table letter should be made for deemed workers just as it is for any employees, based on their age and earnings. It is perfectly feasible that table letter M for a consultant aged under 21, or C for one over state pension age could equally be appropriate.
The issue of student loan deductions was obviously not thought through for the deemed worker process. The fee-payer is not supposed to deduct student loan repayments from the fee paid to the PSC, as those deductions will be reported through the worker’s own self assessment return.
However, as the PAYE records for the deemed workers are not marked as different on the FPS, the automated student loan process kicks in and a start notice can be incorrectly issued to the fee-payer. This leaves the fee-payer having to intercept any such notices before they are automatically uploaded within payroll software.
HMRC says it is working to introduce a marker in the FPS process that would block student loan notices from being issued for deemed workers. It would appear that this marker would have to be inserted on the FPS by the fee-payer, as only the fee-payer knows which records relate to deemed workers, so this new marker would need to be included in any technical specification for 2018/19.
Although the 2018/19 specification has not yet been issued to software developers (it is incredibly late and that is a concern) there has been no suggestion that such a marker is planned. Such a marker would have been a sensible part of the design to have from 6 April 2017.
HMRC has now confirmed that when any further versions of the IR35 guidance are produced they will make clear the differences from the previous iteration. This will be a big help. HMRC also plans to remove any older versions of the IR35 guidance that reference the use of code 0T/1 rather than BR.