IR35: On and off the payroll
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.
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.
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.
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.
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.
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.
At the end of the assignment the deemed worker will need a form P45, indicating the deemed earnings that have been taxed.