‘Off-payroll’ public sector tax changes announced
The Chancellor George Osborne has announced significant changes that might affect people working in off-payroll public sector jobs.
The announcement will change the way that IR35 legislation is applied - meaning that public sector organisations and authorities including Whitehall departments, schools, the NHS, police and public sector broadcasters like the BBC and Channel 4 - will be responsible for interpreting and enforcing the rules from April 2017.
There will be no change for off-payroll workers in the private sector, although this could change in the future.
The Chancellor made reference to the changes in his budget speech, which were more thoroughly unpacked in a technical HMRC document.
Previously, the onus for IR35 was on the individual worker, usually through a personal service company (PSC) or another intermediary, but now the responsibility for applying the rules falls on the public sector employer instead.
The most likely outcome of this change is that many public sector workers will be caught out by IR35 legislation and have to pay more in income tax and National Insurance Contributions (NICs).
In a policy document providing an overview of the change, HMRC acknowledges that the rules around IR35 can be confusing. They also state that non-compliance with the rules is widespread.
In making these changes, the government and HMRC is attempting to improve the effectiveness of legislation and increase tax receipts from contractors working in ‘disguised employment’.
An explanation of the changes reads: “Public sector bodies have a responsibility to taxpayers to ensure that the people working for them are paying the right tax. From April 2017, individuals working through their own company in the public sector will no longer be responsible for deciding whether the intermediaries' legislation applies and then paying the relevant tax and NICs.
“This responsibility will instead move to the public sector employer, agency, or third party that pays the worker’s intermediary. The employer, agency or third party will have to decide if the rules apply to a contract and if so, account for and pay the liabilities through the Real Time Information (RTI) system and deduct the relevant tax and NICs.”
Of course there is no guarantee that the public sector employers will interpret and apply the IR35 legislation any differently, but the government believes that these organisations will be fairer when categorising IR35 workers.
The overview document also alludes to clearer, more objective tests that public sector employers can use to decide IR35 status. HMRC also references a straightforward digital tool that is currently in development.
In the future, these same digital tools could be used to decide on the status of off-payroll workers in the private sector too.
Miles Grady, Director at Umbrella.co.uk said: “This change is going to have a significant impact on off-payroll workers in the public sector. Those affected will have some important decisions to make. Someone in this position might be better off discontinuing their limited personal services company and moving to PAYE or an umbrella company instead.
“As always, the best course of action will depend on a contractor's individual set of circumstances and it is best to get professional advice before making any drastic changes.”
Helpfully, HMRC has published some hypothetical examples of people who will and will not be affected by the changes. We’ve copied out two of these below to help you decide if the changes will apply to you.
Example 1 – Central Government – rules apply
Grace works through her own PSC and is appointed as a senior analyst at the Ministry when the post holder leaves. She is a locum appointed to a project for 5 months while the job is advertised. Human Resources uses HMRC’s online tool to see that Grace is working in the same way as an employee and the new off-payroll tax rules apply. Payroll are informed and tax and NICs are deducted from payments made to Grace’s PSC. The Ministry pays the secondary NICs and accounts for the tax and NICs liabilities under RTI.
Grace’s PSC invoices the Ministry monthly for £2400, which includes £400 VAT. The Ministry treats £2000 as Grace’s earnings and deducts £223 tax and £159 employee NICs, which it pays to HMRC via RTI with £183 employer NICs. The Ministry pays Grace’s company £1618.*
Because Grace has paid income tax on income going into the PSC, she receives a credit against employment and dividend income drawn out of her PSC so she does not pay tax twice. The corporation tax liabilities of Grace’s PSC will remain unchanged by the measure.
* For simplicity, this example does not include 5% expenses, which HMRC will be consulting on.
Example 2 – Contractor – rules do not apply
Tanya is a graphic artist with an established business and a number of clients. She works through her own company. Tanya’s company tenders for work and is hired through her company by the County Council to decorate schools with attractive murals.
When it engages Tanya, the Council’s contracting department uses HMRC’s online tool to check if the new rules apply to Tanya. The tool asks some questions about the engagement and advises the engagement would not have been one of employment if the contract had been directly between the Council and Tanya. No further action is required.
There is no change in the taxation of Tanya or her company.
For more information please contact firstname.lastname@example.org or call 01625 546 610. Umbrella.co.uk