Kate Upcraft asks whether personal service companies and the agencies they work through are ready for the payroll changes due to apply from April 2017.
Cycle of change
In recent tax years there have been many changes to the intermediaries’ legislation designed to get more up-front tax and NI flowing into the government’s coffers. For example, quarterly reporting for employment intermediaries was introduced in April 2014, but penalties for incorrect quarterly reports only applied for the first time in August 2016. The changes due to apply from 6 April 2017 are arguably the most complex so far.
All public sector bodies (PSBs), and there are a lot more than you think, will have to assess if personal service companies (PSC) or partnerships that they are contracting with are within IR35. If those rules apply the contracted PSC or partnership will have to be included on the employee payroll for the calculation, deduction and payment over of tax and NICs.
This represents a significant shift of tax responsibility. Currently it is for the PSC or the partnership to determine if there is a deemed employment relationship with their client and whether for the income from the assignment needs to be treated as deemed salary subject to tax and Class 1 NIC.
If an agency supplies the PSC to the public sector body it will be the agency’s responsibility to manage the payroll obligation. Regardless of who ends up ‘holding the baby’ – the public sector body or agency - the challenges will be the same.
Scope of problem
Someone in the organisation has to take a view on whether the relationship falls within IR35, potentially using a new version of the employment status indicator (ESI) which hasn’t been designed yet. If the IR35 test is positive – in that it does apply, payment of the PSC’s invoice will have to involve both the accounts payable and payroll departments.
Payroll will have to deduct 5% from the invoiced fees (ensuring that materials are excluded) then set up the worker on the payroll to deduct tax and NI that will be paid over with the other employee related remittances to HMRC. The resultant amount due to the PSC then goes back to accounts payable for payment of the invoice and the handling of VAT.
The practicalities of adding the PSC workers to the payroll simply to capture tax and NI will require software and operational changes. For example:
Who takes responsibility for assessing whether IR35 does apply to the contractors affected by the new rules?
Will your client (agency or public sector body) want to set up a separate PAYE scheme for these workers, or at least a separate payroll group to keep them distinct from other employees?
What additional employment rights will this bring into sharp relief for these individuals?
The workers that operate within the PSCs are most certainly workers for auto enrolment under current rules. This means they must be included in the assessment of the workforce and be auto enrolled if they qualify with employee contributions deducted from the invoice too and then refunded if they opt-out.
Central government departments and the NHS are already subject to HM Treasury rules that require them to carry out tax compliance checks on highly paid and long-term contractors, but these changes will build on this framework. The full list of PSBS that will be included in the new regulations are (unless the final proposals change) those covered by the Freedom of Information Act 2000 and the Freedom of Information Act (Scotland) 2002. This includes doctors, dentists, pharmacies, housing associations, schools and universities as well as labour only providers.
As the new rules are unlikely to be finalised until after the Autumn Statement on 23 November 2016, and a whole host of other significant changes coming on stream from 6 April 2017, the worry is whether software developers, public sector bodies, and employment agencies will be able to deliver what is needed to comply.