The intermediaries legislation (known as IR35) has been in existence for many years and is well known by those affected by it. It ensures that individuals who work through their own personal service companies (PSC) pay employment taxes in a similar way to employees, where they would be employed were it not for the PSC or other intermediary that they work through.
However, due to concerns that IR35 is open to abuse and has not been effective in collecting all taxes due from such arrangements, the government has decided to adopt more stringent off-payroll workers rules for individuals working for public sector organisations through PSCs or their intermediary agents.
For all direct engagements between public sector organisations and PSCs, if the engagement falls within the intermediaries legislation conditions, income tax and NICs will need to be withheld by the public sector body at source through PAYE, and the relevant payment made to HMRC through RTI. In addition, the public body will also need to account for employer's NICs and any apprenticeship levy costs arising. If the engagement falls outside the intermediaries legislation conditions, the public body may pay the PSC or intermediary gross.
Where a public body engages a PSC worker through an intermediary agency, the public body will need to consider the intermediaries legislation and notify the agency whether income tax and NICs should be withheld from payments to the PSC at source.
What do public bodies need to consider?
- The new rules affect all payments to a PSC (whether direct or through an intermediary agent) made on or after 6 April 2017, even if the services were provided prior to this.
- The 5 per cent allowance available to PSCs engaged by other (non-public sector) organisations is not available as a deduction for the public body (or the PSC).
- VAT will remain payable to the PSC if the PSC is VAT registered.
- HMRC has set up an employment status intermediaries team that will monitor compliance of the new rules.
- The release of HMRC's online employment status service digital tool has been delayed, but is now available for use by public bodies and intermediary agencies that intend to rely on it to support their decision making in relation to ongoing engagements.
What should public bodies do to get ready for the changes?
Public sector organisations should:
- ensure that the consequential expected increase in costs for temporary workers is reflected in budgets for 2017/18;
- review and consider the impact on existing contractors whose services are likely to continue after April 2017;
- ensure they have a robust policy and process for engaging and paying the PSC/intermediary agency;
- ensure there are good communication channels with PSCs and agencies so that they can communicate the outcome of employment status reviews under the intermediaries legislation to them efficiently and effectively;
- review all existing contracts for services with PSCs and intermediary agencies; and
- consider the potential impact of the loss of key talent.
What should intermediary agencies be doing in relation to public body engagements?
Intermediary agencies should:
- communicate details of the impact to existing workers;
- consider whether to increase agency rates to reflect a fall in the net take home pay by the worker and the increased employment costs (due to employer's NICs and apprenticeship levy contributions) of the agency;
- review all contractual relationships for temporary workers provided to public bodies; and
- consider the impact of some workers choosing to no longer work for public sector organisations.
The new off-payroll rules have wide reaching ramifications, both in relation to increased costs within the public sector as well as significant additional administration to ensure robust compliance by affected parties. This will put added pressure to frontline public services, which could lead to many workers terminating contracts with public sector bodies and thereby creating a major skill shortage in critical areas.
The area where this may have the most significant impact is the NHS. There is evidence to suggest many doctors and nurses may be intending to seek to more work in the private sector and that is likely to create additional staffing problems in the NHS.
Moreover, increased scrutiny by HMRC and cases in which insufficient action is taken by public bodies to comply with the new rules will lead to additional tax settlements, interest and penalties, which could affect the budgets available to public sector organisations in the near future.
For more information please get in touch with Caroline Rai, or your usual RSM contact.