IR35: New guidance for working in the public sector

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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.

Trigger point

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.

Which engagements?

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.  

Summary

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

About shyampattani

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.

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20th Mar 2017 16:15

Nice!

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By mabzden
20th Mar 2017 16:46

The online employment status indicator itself seems pretty balanced and reasonable.

That said, one big problem I've come across is recruitment consultants giving bad advice. (Yes I know, surely not...)

Recruitment consultants get paid commission and kickbacks from umbrella companies. So they're telling contractors that all or most contracts will be caught by the new rules and here's the number of an umbrella I'd recommend.

Oh, and please tell him I gave you his name.

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20th Mar 2017 23:23

Of course the obligation to operate PAYE may fall upon an agency but the obligation to determine whether these rules apply is firmly on the Public Sector Body concerned who may simply insist (as I believe the NHS and certain local councils are doing) that supply must be through an agency to avoid their obligation who they then instruct to operate PAYE...

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By SE
21st Mar 2017 19:44

For me this could lead to a disastrous outcome for the Government. For instance the NHS are taking a blanket view that doctors using their own limited companies are inside IR35 as they want no risk. Therefore, locum agency are saying to doctors we can no longer pay your company gross. Doctors are saying stuff you then and either ceasing company or putting up rates. The NHS needs the doctors so either they pay more or take on the doctor as an employee paying the NHS superannuation plus the sick pay etc. Absolutely ludicrous for me and will cost the taxpayer more.

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By nicmgfi
to SE
23rd Mar 2017 12:40

Except those Doctors who have retired and then consult back to the NHS, superann won't be payable for them.

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By cfield
22nd Mar 2017 11:04

The contracted-out services is an interesting exemption. Of course, they must have this, otherwise all service providers, big and small, would be caught.

Is there anything to stop locums banding together and forming a multi-skilled company? Would this be exempt from the new rules? Maybe any company offering only the services of its directors would be caught, but in that case, just appoint one person (maybe a friend) to be the director and the locums would just be employees and shareholders.

Of course, you'd need to avoid the Managed Service Company legislation, but so long as there is no MSC provider, that shouldn't be too difficult.

Might that be a solution?

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By cfield
22nd Mar 2017 11:08

One thing locums need to watch for is agencies dragging their feet over weekly payments. If they take more than the 7 days or so in the terms and conditions, locums will find themselves being taxed under the new rules on March pay.

Might be an idea for them to warn the agencies in advance that they will expect compensation for any extra tax and NI caused by late payments.

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22nd Mar 2017 11:15

Nightmare this for us - we'll be losing around 15 clients. We even tried to start up a subsidary to the practise to trade only as an Umbrella so we can keep these locums - basically the agencies only want them to use the Umbrellas they recommend however.

Hate these changes!!

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By NH
to bigmuggsy
22nd Mar 2017 14:26

I really feel for you, we have 4 clients in this situation so not as bad but even so.

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By IANTO
22nd Mar 2017 11:15

"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)."

That is just an opinion. It will be for the courts to decide this. HMG are in very real danger of starting a flood of ET cases where individuals are taxed as employees, but are denied the accompanying employment rights.

Matthew Taylor has already indicated that if the engagement is classed as "employee like" i.e. disguised employment, then the client involved should effectively provide the employment benefits.

By determining that an engagement is subject to the IR35 rules, the client will effectively be signalling that the engagement is one of service, i.e. employed. The next few months will prove to be very interesting!

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22nd Mar 2017 11:34

Thanks Shyam
I have completed a detailed review using the Gov publication: Off-payroll working in the public sector - information for agents.
In their worked example I cannot see how they have arrived at the PAYE figure of £1458 and primary class 1 £413.00 based on a net contract fee of £6000.
I am also at a loss to understand how the net amount can then be paid out without further taxation either as a salary or dividend. How does the contractor get his free pay relieved and if he is liable to higher rates of tax how does that work?
I would be interested if any one else has a solution or is similarly confused.
Roy Price FCCA

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to Roy Price
24th Mar 2017 11:27

Sorry if anyone has already answered this.

I understand that HMRC will ultimately issue coding notices to the body deducting the tax which should factor in the free pay.

Higher rate tax will be caught through the tax return that the individual will no doubt have to fill in (or the equivalent under MTD).

I have been qualified for 37 years and have never seen a shambles like it. (Off payroll, Flat Rate Scheme, MTD, Brexit etc.)

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to Roy Price
24th Mar 2017 11:27

Sorry if anyone has already answered this.

I understand that HMRC will ultimately issue coding notices to the body deducting the tax which should factor in the free pay.

Higher rate tax will be caught through the tax return that the individual will no doubt have to fill in (or the equivalent under MTD).

I have been qualified for 37 years and have never seen a shambles like it. (Off payroll, Flat Rate Scheme, MTD, Brexit etc.)

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By cfield
to Roy Price
11th Apr 2017 20:02

Just to answer your query on the tax figure, the £1,458 is calculated as follows:

Free pay = £959 x 0% = £0
Basic rate = £2,791 x 20% = £558
Higher rate = £2,250 x 40% = £900
Total earnings £6,000 less £1,458 tax

You just divide £11,500 and £45,000 by 12 to get the above figures.

The £413 NI is worked out in a similar fashion:

PT = £157 x 52/12 = £680 x 0% = £0
PT-UEL = £709 x 52/12 = £3,072 x 12% = £368
Above UEL = £519 x 52/12 = £2,249 x 2% = £45
Total earnings = £1,385 x 52/12 less £413 NI

However, the agency or umbrella company will probably have to operate a BR tax code.

Sections 13-18 allow the company to claim relief against PAYE and corporation tax (note the new data field 58A on RTI submissions) but is silent on what happens if you disagree with IR35 status and wish to take a lower salary. Claim a tax rebate by letter I suppose. That should be fun!

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22nd Mar 2017 11:36

My experience to date is that the ESS tool is irrelevant. Every client I have in these circumstances has been told that the new rules apply to them and PAYE will be operated. There is no effective appeal process - it's take it or leave it.

Curiously, at least one agency is making this ruling and also saying that it won't operate PAYE. It will cancel all existing contracts at the end of March and workers will have to operate after that through umbrella companies who will run the payrolls instead - at additional cost to my clients.

They look like they could be in for a bit of a bonus too. If your contract ends this month anyway, any unpaid invoices at 31/3/17 won't be paid unless you sign up with an umbrella company - I wonder if some workers won't bother, at least not for a while.

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22nd Mar 2017 11:56

As per the HMRC guidance PSC is responsible for:
-Payments such as Statutory Sick Pay, Maternity Pay, Paternity Pay, Adoption Pay, Redundancy Pay continue to remain the obligation of the PSC to pay to the worker.
-Obligations for other employment rights, such as the right to receive NMW, unlawful deduction from wages, auto enrolment, etc. continue to remain the responsibility of the PSC.
Contract worker having no additional rights of an employee? Can contractor workers challenge this position in employment tribunal to obtain those rights from engagers, i.e. if workers are taxed like employees they may well have a much stronger claim to such rights from engagers.
How this will be managed within PSC Payroll Systems, as all income are taxed at source?

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By IANTO
to Myaccountancyteam
22nd Mar 2017 13:16

"Contract worker having no additional rights of an employee? Can contractor workers challenge this position in employment tribunal to obtain those rights from engagers, i.e. if workers are taxed like employees they may well have a much stronger claim to such rights from engagers."

absolutely and organisations representing freelancers are gearing up to do just that!

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22nd Mar 2017 12:14

A number of contractors are not being given a choice - they have to use an umbrella company. That way the agencies avoid paying the employers NIC and the apprenticeship levy

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By IANTO
to Fumi Popoola
22nd Mar 2017 16:13

"A number of contractors are not being given a choice - they have to use an umbrella company. That way the agencies avoid paying the employers NIC and the apprenticeship levy"

The actual Finance At now requires the client to employ "due diligence" in assessing a worker's status under the rules. This means that blanket decisions will likely to be illegal.

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to IANTO
22nd Mar 2017 17:15

Illegal maybe, but is your small contractor client going to try to sue a government department?

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By cfield
to nigel
22nd Mar 2017 17:40

No, but it might make them think again. Also, if enough contractors complain about it, they might be able to put enough pressure on them to reverse the blanket policy.

That ESS tool has a section for rectification of errors. I'm not sure how much weight the tool places on that, but if it's a game changer, they could re-write the contracts to ensure contractors rectify errors free in their own time, and enforce it too from time to time. I'm sure none of the contractors would complain.

I sometimes advocate this to new clients worried about IR35, only half tongue in cheek too. I call it the "[***]-up tactic". Just make a small error and say to the client, "Don't worry, I'll fix it for free".

Of course, we all know the ESS is crap, but if HMRC are willing to pass contracts on that basis, then why not make use of it. Hoist them with their own petard.

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By cfield
to cfield
22nd Mar 2017 17:48

Just noticed the stars come up. That wasn't me. Their software obviously has a list of naughty words it has to "bleep" out.

Actually it wasn't a particularly naughty word. It was the word for a male hen, and the phrase itself has inoffensive origins. Comes from typesetting or archery apparently.

However, I note they let my other naughty word go, so I got away with that one!

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By IANTO
to nigel
23rd Mar 2017 08:28

Any legal action would be undertaken in the ET. So the size and authority of the PS organisation would be of no consequence.

Any such claimant wold be on a win win situation, just as I was in my case J.M.Williams v's Hewlett Packard December 2002 heard by Mr. Justice Elias.

If the ET determines that the engagement is one of service, then the PS organisation will have to provide the employment benefits. If the ET determines that the engagement is one for services, then IR35 doesn't apply.

It's a win win for anyone who wishes to follow that path as I did.

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22nd Mar 2017 13:44

The HMRC ESS tool has lost all credibility, due to the fact that (a) it's answers do not come out the same as all the IR35 court cases, (b) agencies have used it and don't agree with the answers, (c) Large tax consultancies are saying it is not very reliable.

At ContractorCalculator we've worked out that it's sticking many people in 'unknown' when they aren't even borderline cases, and we are seeing about a third of people being passed when they should fail.

And finally, the HMRC ESS Tool has no legal authority. It cannot be legally binding - as HMRC do not have those powers, and it's not written into the legislation.

The whole thing has been an utter shambles. Blanket rules are being put in, IT contractors are jumping ship (because they can).

The only good thing we are seeing is that some "vulnerable workers" are finally being able to work on payroll and get the rights they deserve.

Bizarrely, we've spoken to many accountants who have been running PSCs for nurses and social workers for years and are aghast that their business is collapsing. It's not good of course, but it's not as if the whole market didn't see this coming. All the predictions people made about the chaos are spot on.

And rumours are that HMRC want to roll out to the private sector next year.

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22nd Mar 2017 15:02

The next question will be whether the VAT nursing concession applies to umbrella companies?

The nursing concession applies between the agency and the end employer, ie the NHS. The umbrella becomes a third party supplier to the agency and not the end employer

So is VAT chargeable by the umbrella company to the agency?

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23rd Mar 2017 12:09

And next year....I predict it will be announced in the Autumn statement this will apply to non government bodies too....

I reckon thats then 5,000 accounting staff fired across the uk as all their clients go onto paye and theres no work for them

Have your contingency plan ready chaps....because thats worse than the hike in audit limits for us

Or possibly they will move onto basic MTD bookkeeping depending on the timing of these 2 major reforms

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to Tom 7000
23rd Mar 2017 12:15

If the government really wants to save money they should cut the agencies out of the loop and just take the individuals on the books.

Agree with Tom 700, after the self employment/PSC/employment review, in the autumn statement HMRC will apply this to the private sector as well.

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By cfield
to North East Accountant
23rd Mar 2017 12:36

I don't think it's about saving money or even increasing the tax take. It seems to be an ideological thing. They've got a real bee in their bonnet about people paying the same tax. Maybe it's because they're wage slaves and can't stand the thought of the self employed getting tax breaks they don't get themselves.

Funny as that was always kind of accepted by previous governments as a sort of quid pro quo for having the gumption to run their own businesses. Not any more!

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By cfield
to North East Accountant
23rd Mar 2017 12:43

North East Accountant wrote:

Agree with Tom 700, after the self employment/PSC/employment review, in the autumn statement HMRC will apply this to the private sector as well.

They will have a much tougher job trying to roll this out to the private sector too. Contractors are more mobile and have greater bargaining power. The senior ones won't accept blanket rules forcing them onto umbrella payrolls.

They will be more inclined to contract-out services or use the ESS (or a more credible alternative) to decide status for their key contractors.

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22nd Mar 2017 18:21

soon getting involved with tax will be too risky .full stop. It is so complicated

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26th Mar 2017 09:53

When we 'dared' to recommend using our own Umbrella company instead of the agency one they became a tad hostile toward our locum client and us. To settle it we had complete a questionnaire which would be reviewed - surely if an agency (like all of them) isn't willing to pay a PSC they should allow the locum to choose any umbrella company? Must be some backhanders being made this month!

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