Substantial changes to the way off-payroll labour is engaged in the public sector will take effect from 6 April 2017 and all public sector bodies should now be assessing the impact this will have on their organisation.
Why are changes being introduced?
Currently, where a worker provides services to a public body through an intermediary personal service company (“PSC”), it is the responsibility of the worker to assess whether or not the service could be deemed to be an employment and whether PAYE and NIC should apply to the contract under the ‘IR35’ rules.
However, the Government is concerned that these rules are not being applied correctly and the level of perceived tax abuse arising from workers using intermediaries to supply their services to public bodies. It believes that in many cases such 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.
The new rules mean all public bodies must review their off-payroll labour workforce to understand if the new rules apply to any of the individual workers utilised under their arrangements.
Who is affected?
The legislation in Finance (No 2) Bill 2016-17 addresses “Workers’ services provided to public sector through intermediaries”. The legislation defines a public body as a body that falls within the Freedom of Information legislation – see England and Wales or Scotland. Equally, the definition of ‘intermediaries’ is very wide: 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.
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.
What does a public body have to do?
From 6 April 2017, public sector bodies will assume much more tax responsibility for off payroll labour: a public body must identify any intermediary it uses for each contract it enters into. It will then 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.
HMRC has published the Employment Status Service (“ESS”) online tool to help public bodies assess whether or not a worker should be deemed to be an employee for this purpose and the tests will need to be applied for each contract the public body enters into. Whilst the ESS tool is a source of assistance and should be considered by public bodies as a means of considering if the new rules apply, employment status is a notoriously difficult area of tax law and public bodies will have to exercise great care when using it.
If a 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 and NIC from the payment and becomes liable for employer’s NIC 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. Clearly, public bodies will want to ensure that their suppliers meet these obligations.
- 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.
What time limits apply to the public body?
The public body must complete the assessment of the worker and where the worker is a ‘deemed employee’, the public body must advise the fee payer of the assessment outcome within strict time limits, as noted below:
- For contracts which are already in place prior to the 6 April 2017, the public body must advise the fee payer prior to any payment being made after 6 April 2017
- For new contracts entered into after 6 April 2017, the public body must advise the fee payer on or before the time of entry into a contract (or if the services begin to be performed at a later date, before that later date).
Where the public body fails to meet the deadlines above, the public body itself will become the fee payer and therefore responsible for operating PAYE/NIC deductions on the payment to the workers intermediary, whilst also being liable to Employers NIC and where relevant the Apprenticeship Levy.
Public bodies must submit regular information to HMRC about each worker caught under these rules as part of their usual RTI payroll returns: each worker must recorded as a ‘declaration C starter’ when the work on each contract commences.
Where the contract for an off-payroll worker is assessed and the worker is found not to be a ‘deemed employee’, the public body will no-doubt wish to keep an audit trail to evidence its decision making process: in due course, HMRC can be expected to ask for proof of each body’s compliance processes during payroll audits. Failure to operate PAYE and NIC deductions correctly will prove to be an expensive mistake.
HMRC has issued guidance on what to do if you are a fee payer.
What should we do?
All public bodies need to understand their respective position in every contract chain where an off-payroll worker is undertaking work for them. 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.
As a matter of priority, public bodies will need to identify any worker under an existing contract to ascertain if the new rules apply, prior to making any payment for services after 6 April 2017, otherwise the public bodies are liable to a claim for underpaid PAYE/NIC.
Therefore, they may wish to engage with the employment agencies and intermediaries they use to review contract and practical arrangements so that likely obligations under these new rules are known and suitably managed. Some may wish or need to change their operational arrangements where there are clear practical benefits to directly employing such workers.
Increased cost implications
It is widely predicted that temporary labour costs for public bodies will increase under these rules. Apart from the increase in employer’s NIC and Apprenticeship Levy that public bodies pay, workers are expected seek to increase their charge out rates for public sector contracts where tax is likely to be deducted (or simply refuse to take them). Managing these costs will be a major challenge at a time of ever greater budgetary constraints.
Where it is decided that a worker falls within these rules and the public body deducts PAYE and NIC, the worker may decide to seek wider employment rights (e.g. holiday pay and pensions) in line with many recent employment law cases.
How BDO can help
BDO can help you identify and quantify the potential risks to your organisation and help you build policies to reduce the risk through changes to contract terms and the way off-payroll workers support your day to day operations. We can also help create efficient internal processes to identify affected workers and ensure accurate tax compliance going forward.
For help and advice on these issues please contact Nick Duffin or Stephanie Wilson or your usual BDO contact.