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Public sector contracts and suppliers using off-payroll labour

24 March 2017

At first glance, you might think that the legislation in the Finance (No 2) Bill  2017 on “Workers’ services provided to public sector through intermediaries” only affects public sector bodies and employment agencies. In fact, it has the potential to affect any organisation that supplies services to the public sector that includes the use of off payroll labour (OPL).

You may have seen commentary on the use of Personal Service Companies (PSCs) or that the ‘IR35’ rules are changing in this sector. Workers who provide their services via a PSC will be affected, but so may individuals, Limited Liability Partnerships and any organisation involved in a supply chain that ends with a public sector body (defined below): HMRC’s definition of ‘intermediaries’ is very wide, as is the definition of a public body (see links in flowchart below).

Why is it being introduced?

The Government is concerned about the level of perceived tax abuse arising from workers using intermediaries to supply their services to public bodies. Its concern is that these workers are avoiding paying employed levels of tax and NIC, where their services would be an employment (or office) of the public body if they were contracted directly.

Who is affected?

From 6 April 2017, anyone in the supply chain who is involved in the procurement of a worker supplied to a public body via an intermediary is affected by the new rules. This means that there are potential consequences for any organisation, from the public body to an employment agency, professional services consultancy business or any third party within a supply chain. The new rules apply to all payments made after 6 April 2017.

How will the public body’s actions affect you?

From 6 April 2017, each Public body must identify any intermediary it uses. It will need to make a decision about whether the worker being supplied by the intermediary would be an employee and/or office holder if it had engaged the worker directly.

If the Public Body decides that the worker would be a deemed employee or office holder, one of the following scenarios will arise:

  • If the Public Body pays the worker’s intermediary, the Public Body becomes the ‘fee payer’. It then has a responsibility to deduct PAYE/NIC from the payment and becomes liable for employer’s NICs and Apprenticeship Levy payments (if its pay bill exceeds £3m).
  • If there is another organisation in the contract chain between the Public Body and the intermediary, then this organisation will become the ‘fee payer’ (as it is closest to the worker’s intermediary) and it must fulfil the tax and NIC withholding requirements.
  • Where there are a number of organisations in the contract chain, the ‘fee payer’ will always be the organisation that contracts directly with the worker’s intermediary.

HMRC has issued guidance on what to do if you are a fee payer.

The legislation places a requirement on the public body to inform the organisation it engages with that it believes a worker should be a deemed employee, within prescribed time limits.  For any new contracts entered into from 6 April 2017 onwards, the decision must be provided by the public body before the time of entry into a contract (or if the services begin to be performed at a later time, before that later time). If the contract is already entered into before 6 April 2017 the public body needs to tell the fee payer prior to the first payment being made after 6 April.

If the public body fails to advise the fee-payer by these deadlines, the public body will become the fee payer and therefore liable to operate PAYE/NIC deductions on the payment to the worker’s intermediary.

However, there is no requirement for this information to be passed on to other organisations in the contract chain. Practical and commercial realities mean that, unless the other organisations in the contractual chain are involved in sharing the relevant information, there is a real risk of non-compliance.

What should I do?

Any organisation affected by the new rules needs to understand their respective position in every contract chain where an off-payroll worker is undertaking work for a Public Body. Adequate due diligence of the full contract chain is vital, as it is with other anti-avoidance legislation. Obligations and financial implications should be identified and addressed. It is also necessary to examine what procedures need to be amended or introduced to manage any contractual requirements (and commercial relationships).

All organisations who are involved (or potentially involved) in the supply of OPL to Public Bodies should consider the impact of this new legislation as a matter of urgency. For some practical examples on how HMRC sees this applying in practice see HMRC examples - OPL in the Public Sector.

For further information on this issue please contact Stephanie Wilson or Nick Duffin.

The flowchart below sets out who is affected and what the impact could be.

1 This includes related services such as the installation of goods purchased from you.

2 Public sector organisations are listed here:

3 OPL includes personal service companies (PSCs), and can include LLP’s & individuals in certain circumstances


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