Shyam Pattani, senior consultant with Chartergate Legal Services, analyses HMRC’s guidance on the new rules for off-payroll working in the public sector.
It is happening
Despite calls from many commentators, including the CIOT, to delay the commencement of the new IR35 rules until the digital employment status service (ESS) tool has bedded in, the government is determined that off-payroll working for public sector contracts will take effect from 6 April 2017. As the final legislation governing these rules won’t be published until 20 March, all we have to refer to is HMRC’s guidance, which is their interpretation of the new rules, not the law.
It is the payment that triggers the new rules, i.e. if the services are provided before 6 April 2017 but payment is made on or after that date, the payment should be considered under the new rules before it is made. This means that contracts entered into by public authorities prior to 6 April 2017 are affected.
HMRC’s guidance for agents (section 7) acknowledges that contractors’ fees are likely to be re-negotiated by engagers:
“Because the fee payer has a liability to pay secondary Class 1 NICs, they are likely to wish to renegotiate the fee with the intermediary to reduce the rate for the job. They cannot lawfully deduct the secondary NICs from a fee that has been agreed, but could depending on the contractual terms, negotiate a lower fee.”
In other words, it is likely that the cost of this change is going to come from the personal service companies (PSCs) rather than the public authority (as was originally intended).
Whether this sees further mass walkouts of off-payroll workers (many are giving their notice on projects before the new tax year) or sees the public sector reviewing and increasing rates to ensure the sector continues to have access to a diverse talent pool, is yet to be seen. This may well mean the £185m estimated to be collected under the new regime is ploughed back into the various public authorities in order to fund the hike in rates demanded by PSCs.
Which bodies are affected?
A client will be a public authority, and hence required to apply the new IR35 rules, where it falls within the definition as set out within the Freedom of Information Act 2000 (FOIA). HMRC attempted to compile a list of various public authorities as part of the original consultation, which is useful, but not comprehensive. We hope HMRC will provide a comprehensive list of public authorities as requested by a number of stakeholders.
The overview to the HMRC guidance, states that the new rules do not affect:
- workers who only provide their services to private sector organisations
- fully contracted-out services delivered in the public sector
- where an agency directly employs a worker and it operates PAYE and NICs on earnings it pays to the worker
- managed service companies
- foreign entertainers who are within the statutory tax withholding scheme
The second bullet point is interesting. What is a fully contracted-out service?
This is a new term with no definition, but it is an area where a number of PSCs may believe they fall. HMRC’s failure to provide any clarification on this point is disappointing, and we would advise those who think they may be providing a fully contracted-out service to seek qualified advice.
Other rights and obligations
The tax and NIC changes do not alter or enhance the worker’s entitlement to statutory rights, most of which remain with the PSC, (see our newsletter for details). The worker will not acquire any additional rights as if he was an employee of the fee payer, although he will be largely taxed as one.
The only additional obligation for the fee payer is in relation to the apprenticeship levy, which is an additional payment due from employers with a pay bill in excess of £3m. The change to the off-payroll working in the public sector is likely to have a significant impact on the amount of levy collected.
We are disappointed that the HMRC guidance has not done more to provide contractors, agencies, intermediaries and public authorities with specific guidance and realistic examples. Much more work is required on the guidance and the ESS tool to provide more assistance to those that are the subject of the changes. It would have been far more appropriate for HMRC to have published the final legislation and then produce guidance based on the law.
At present the guidance is of little help. The ESS and guidance do at least provide one certainty, which is that those affected by the new legislation cannot rely on them as the panacea that will help them navigate the changes.
About Shyam Pattani
Shyam started his career in tax at a top 30 accountancy practice in the East Midlands working in the personal tax department looking after high net worth individuals, partnerships and trusts.
Shyam, for the last six years (joining Chartergates in February 2013), has been defending challenges from HMRC in respect of employment status, IR35, the Construction Industry Scheme and the ever-changing HMRC penalty regime on behalf of clients as well as representing clients before the first-tier tax tribunal.