Practice News

Off-payroll working in the public sector: a shift in responsibility

Background

One of the intentions behind the intermediaries legislation – commonly known as IR35 – is to ensure that individuals who provide their services through a personal services intermediary (generally a personal service company) cannot avoid paying the income tax and national insurance contributions (NICs) which would have been payable had they been engaged, as an employee, directly by their client. For ease, in this note we refer to relevant personal services intermediaries as PSCs.

Until now responsibility for determining whether IR35 applied, and for accounting for income tax and NICs, lay with the PSC, which benefitted from a 5% allowance to reflect the cost of administering the rules. However, the government has long been concerned that there is widespread non-compliance with IR35 and that HMRC does not have the resources to effectively enforce it. As a result, under new rules applicable to public sector bodies, responsibility for determining whether IR35 applies and consequently whether any relevant tax deductions should be made, will shift to the public authority from April 2017.

Who is affected?

The new rules apply to public authorities, as defined in the Freedom of Information Act 2000. This includes government departments and their executive agencies, educational establishments including universities, local authorities, parish councils and the NHS. It also includes many companies owned or controlled by the public sector.

The PSCs themselves will lose the 5% allowance but will still be able to claim business expenses for the costs of their administration.

Third parties, such as employment agencies, outsourcing companies and consultancy firms which supply workers via their PSCs to public sector engagers will also be caught by the new rules. Where it is the third party that makes the payment to the worker's PSC, it is that third party and not the public authority which is responsible for making any relevant tax deductions.

What about employers in the private sector?

Employers in the private sector should also take heed of these changes. The government estimates that the new rules will raise an additional £555 million in revenue by the end of 2020-21. If successful, therefore, despite their comment that there are "no current plans to extend the reform beyond the public sector", it seems likely that the government will target non-compliance with IR35 in the private sector next. In the shorter term we may see a move of contractors from the public to private sector.

When does it apply?

The reform applies to contracts entered into any and payments made on or after 6 April 2017. Where work is completed before 6 April 2017 but payment is made on or after 6 April 2017, the new rules will still apply.

What does the public authority have to do?

The public authority is obliged to determine whether the off-payroll working rules should apply (see below), and if so:

notify the PSC whether the off-payroll working rules apply deduct income tax and employee NICs from the payment and account for them to HMRC account for employers' NICs.

Note that where the public authority is using a third party (e.g. an employment agency) to provide labour, the public authority must notify the third party whether the off-payroll working rules apply. If so, the third party generally becomes liable for the taxation and NICs rather than the public authority.

If the intermediary is a compliant managed service company or the workers in question are subject to PAYE and NIC as employees of an agency or umbrella company, the arrangement will be outside the new rules.

Why is this significant?

As well as creating an administrative and compliance burden for public authorities and their labour suppliers, the new rules will result in additional costs in the form of employers' NICs. In addition, payments made as a result of the new rules will count towards calculating liability for the Apprenticeship Levy.

In order to process payroll for individuals caught by the new rules, certain information will be required which the public authority (or relevant third party) may not currently have, such as the ownership structure of the PSC and the legal form of the entity in question, as well as the individual's national insurance number, P45, date of birth and address.

Stakeholder pensions, statutory payments and other employment rights are not affected by the new rules, however.

Without the benefits of the tax advantages a PSC can provide, many workers may consider that they would prefer to benefit from the protections that employment law provides to employees rather than simply bearing the additional cost with no upside. This could result in additional costs over and above the administration of the new rules.

How do we determine whether the off-payroll working rules apply?

The new rules apply when:

What should public authorities do now?

Public authorities should:

Given the lost cost benefit of using PSCs, public authorities may consider engaging workers directly instead. However, workers engaged directly would benefit from additional employment benefits for workers, such as national minimum wage, paid annual leave and protection from unlawful deductions from wages. If the individual was to be viewed as an employee this would bring with it significant additional rights and protections.

Detailed guidance on the application of the new rules, together with worked examples, has been published by HMRC here: https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note

In particular, a crucial question is whether the worker would, if contracting directly with the public authority, be regarded as an employee of the public authority for tax purposes. To help with this assessment, HMRC has produced a digital tool, the Employment Status Service, to provide the HMRC view of the worker's employment status. However, there may be particular circumstances where a more detailed analysis of an individual's status would be advisable.

Making Tax Digital

HMRC's initiative titled "Making Tax Digital" means that most businesses and landlords will be required to submit a quarterly tax return together with their usual annual tax return. Here is a headline guide to the proposals;

Who is affected?

Every business, landlord and small company with income over £10,000 will be caught under these new rules, but the dates are staggered according to the size of your business activities, as follows:

What needs to be submitted to HMRC?

A simplified tax return will need to be submitted every three months to HMRC, together with an annual declaration. For smaller businesses this can be prepared on a cash basis, which simplifies this process.

What can I do to prepare for this?

The first big challenge for many businesses, especially those that aren't VAT registered, is going to be keeping their records up to date every three months rather than doing this once per year. There have been significant advances in book keeping software over the past five years and these can help with this administrative burden.

Cloud based packages such as Kashflow, Xero, Sage One etc will extract your bank statements directly from your bank to save you recording every payment and receipt. It will even allocate transactions automatically based on the rules you set. Another advantage of cloud based systems is the ability to allow your accountant to login and make changes, rather than sending backups via email. Having up to date information and making book keeping as quick as possible is going to be essential to meet the increased number of HMRC deadlines.

The second challenge is whether your accountant is prepared for this - this is a massive change for the accounting profession and its impact can't be underestimated:

What about tax payments?

HMRC are not currently proposing to ask for tax to be paid quarterly. However, it will be possible to make voluntary payments based on your quarterly tax submissions.

However it would seem likely that this will change in the future and quarterly tax payments will be based on your quarterly tax submissions. This will increase the importance of accurate submissions and may lead to cash flow difficulties for seasonal businesses.

If you have any queries with any of the above or want to know how Ribchesters can help your business please do get in touch.

Patent Box Regime

Ribchesters has tremendous recent success assisting clients with this lucrative tax incentive.

For background, the Patent Box regime is a Corporation Tax relief which gives a reduced rate of tax (10%) on income deriving from the commercial exploitation of patents.

Overview

The 10% rate applies to profits earned after 1 April 2013 from a company's patented and other innovations. The relief is being phased in over four years, so full relief at 10% on all patent box profits will not apply until 2017.

Under the measures a company will qualify for relief if it:

Additionally, companies who are part of a group must meet an active ownership requirement. The definition of a group is wider than for group relief and includes associated companies.

Qualifying income

Excluded income

Routine profits are deducted from total profits to arrive at "qualifying residual profit", in this step it is assumed that companies will achieve a cost plus 10% mark up on all their expenses.

Smaller companies (those with a qualifying residual profit of less than £1 million) may then deduct 25% for marketing asset return from residual profits. Larger companies wanting to deduct a lower rate must use a transfer pricing calculation to deduct a notional marketing royalty based on the price that a third party would pay to exploit the brand.

For more information or to discuss how this may apply to your company please do get in touch.

Planning for Later Life Seminar

Friday 17 February 2017 Ramside Hall Hotel, Carrville, Durham, DH1 1TD

Planning for Later Life Seminar speakers will be cover Long-term gifts with County Durham Community Foundation, Finance and investments with Ribchesters, Legal responsibilities with EMG Solicitors and Care management from Northumbria Financial. For more information, download the flyer (attached) or email sarah@cdcf.org.uk

Planning for latter life

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