by Mike Hoyle | 18 January 2017
The Government published its proposal for the reform of the off-payroll rules (known as IR35 or “the intermediaries legislation”) within the public sector in May 2016.
In summary, this legislative change means that the responsibility for operating IR35 when working in the public sector will shift from the individual contractors’ limited company (also known as a Personal Service Company or PSC) to the engager. The engager is the public sector body or agency that is paying the PSC.
The consultation was open to responses by all interested parties until 18 August 2016, of which Sellick Partnership was one. We lobbied on behalf of both our Clients and Contractors regarding the proposed changes and some of our points are clearly included within the draft legislation.
The draft legislation was then produced in December 2016 and HMRC invited responses to this by the end of January 2017. According to HMRC they expect these changes to bring in an additional £25 million in the tax year 2017-18.
The digital tool
HMRC is currently developing a digital tool, which can assist in determining the IR35 status of a contractor and the contract role. It is currently in a testing phase and will be released to a small number of invited people on 25 January 2017, with the intention to release the testing of the tool to the public on 25 February 2017.
Currently HMRC envisage the digital tool won’t be released as a final working and reliable application until 1 April 2017, at which point HMRC has said that they will continue to monitor and update thereafter.
From reviewing the current digital tool, it seems that roles that have no Supervision, Direction or Control and do have a genuine right of substitution, would be seen as outside these new rules and payments to the PSC can continue as normal.
Key points from the draft legislation
The Government has now produced the draft legislation regarding the IR35 tax changes, which will result in Personal Service Company (PSC) contractors in the public sector losing their right to determine their own tax status.
The change affects all Clients who are listed as a public authority under the Freedom of Information Act 2000. For the avoidance of doubt, this does not affect candidates working for private sector Clients.
Where, in the absence of a PSC, the contractor would have been regarded as an employee of the public sector authority (under the IR35 rules), the public sector body or the agency will be required to treat payments made to the PSC as if they were earnings paid to the contractor from an employment with the public body (‘deemed employment payments’).
From 6 April 2017, where the contractor works in the public sector, the responsibility for determining the IR35 status of a contract and for calculating PAYE and National Insurance Contributions on that income and paying across to HMRC will be transferred from the PSC to the organisation paying the contractors company (Sellick Partnership) where the rules apply.
What this means for Sellick Partnership contractors
From April 2017, Sellick Partnership will determine if a contract will be inside or outside the IR35 legislation, however prior to any decision being made, information will be needed from each Client, and if necessary, each contractor to determine if the new rules will apply. If a Client determines the role should have the new rules applied, then Sellick Partnership will abide by this decision.
Where the rules apply, the placement will be treated as deemed employment and deductions will be made for tax and National Insurance contributions (on the net income i.e. before VAT). There is currently an allowance for direct costs of ‘materials’ (physical materials such as building supplies) and amounts that represent deductible expenses (which would have been met by the public sector should an employment relationship exist), although this could be amended in the final legislation.
There are exclusions to the draft legislation, including but not limited to, umbrella workers and contractors being paid through the agency’s PAYE, if they currently operate one.
Finally to note that the legislation is applied on a payment basis rather than a service basis. This means all payments made to contractors on or after 6 April 2017 will be treated under the new legislation without regard as to when the time was worked. Payments cannot be expedited before supply has been made.
There is still confusion in the market as to how the final legislation will be applied across all contractors working within the public sector and with the expected final legislation not due out until mid to late February, it is important that all parties understand that changes will be made to their current arrangements.
As soon as the final legislation has been released and evaluated, we will update all our contractors as to how this new legislation will affect them and their current contract within the public sector. However, we will be working with our Clients and all invested parties to determine the status of each role, based on the current draft legislation in the coming weeks.