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HMRC issues new IR35 consultation on PSCs working in the Public Sector
28 May 16 | By: Jas Jhooty
One of the announcements in Budget 2016 was that Public Sector bodies would be forced to be responsible for operating a supplementary payroll on invoices received from Personal Service Companies (PSCs). HMRC have recently issued a new consultation giving details of how they are proposing this should occur.
What the consultation coversThis consultation is about reforming the intermediaries legislation to improve its effectiveness in the public sector. It seeks views on the impacts of this change and design details of the policy, including a new process to help determine whether an intermediary is in scope of the rules. The consultation asks for opinions on:
- the scope of the reform of the intermediaries legislation
- ways to minimise burdens on engagers who are affected
- how the reformed rules will work
Scope of the new rules
The basis on which the rules are applied to determine whether a worker would have been an employee if engaged directly is not changing. This is the case for engagements with both private and public sector clients. The new rules move the liability to make the determination about whether the intermediaries rules apply, and the associated tax liability if so, from the PSC to the public sector end-client or agency or other third party closest in the chain to the PSC if there is one. Most importantly, the rules will not change for PSCs contracted to work for clients in the private sector.Public Sector employers need to ascertain if certain suppliers will be caught within the scope of the new rules by answering yes to all of the following questions: -
- Are you a public sector organisation? (a full list of Public Sector bodiesis provided at the end of the consultation document)
- The worker is not hired through an agency?
- Is less than 20% of the contract for materials consumed in the service?
- Does the worker own their own company?
Ways to minimise burdens on engagers who are affected
Although decisions about whether the intermediaries rules apply are usually straightforward to determine for most workers, there are some honest misunderstandings on the part of businesses and individuals around what factors should determine employment status. Moreover, the government acknowledges that at the margins, there can be genuine uncertainty over employment status for tax.The government aims to ease the burdens on Public Sector employers by truncating the normal raft of employment status questions to determine whether a PSC is caught by IR35 intermediaries legislation , to just two questions:-
- Is the worker required to do the work themselves?
- Does the engager decide or have the right to decide how the work should be done?
If the answer to these two questions is not clear cut then all employers (be they Public Sector or Private Sector) can utilise HMRC’s to be published new Digital Tool for determining the employment status for PSCs. This will be based on the HMRC’s new ESI tool and will be available before April 2017 when the new rules are deemed to apply.
How the reformed rules will workUnder the new rules, liability to pay the relevant employment taxes will move to the engager or the agency supplying the worker. This means public sector organisations and agencies supplying workers to the public sector will be responsible for:
- deciding if the rules apply; and
- calculating, reporting and paying the relevant taxes if they do.
Where HMRC identifies the rules have not been applied properly, and inappropriate or inaccurate
information has been used to make the determination, there are options for deciding where the liability should fall which could include one or more of the following:
- jointly and severally on the engager and the PSC;
- on the engager alone – this means if the engager makes a wrong decision, for example, that a worker is not in scope for the off-payroll rules, then that engager may be liable for interest and penalties. The engager would be similarly liable if the decision is wrong but accurate information has been provided;
- where the PSC or worker fraudulently gives the agency or public sector engager incorrect information;
- on the director of the PSC and/or the individual worker; or
- on the PSC itself.
Sixteen questions accompany HMRC’s proposals contained in the consultation document. They cover various topics e.g. where agencies will have to test for IR35, the incidence of multiple agencies; VAT, transfer of liability and the 5% expenses rule, among other areas.
Respondents to this consultation have until 18th August 2016 to make their representations.
How emTax can help
We recommend that all Public Sector employers start examining the actual terms and conditions of their engagements with off-payroll workers especially those supplied through their own Personal Service Company. Unfortunately, what is written into the contract for services is not as important as what happens in practice when it comes to determining a worker’s employment status.
Our consultants are ex-HMRC and also have extensive experience of working within the “Big 4” accountancy firms. We pride ourselves in being able to deliver “Big 4” quality employment tax advice but at a fraction of their prices.
We have devised a two stage process that will aid employers immensely in this matter. This comprises of: –
- A review of written self-employed and direct hire Personal Service Company contracts – It is essential to ensure that contracts are robust so that they clarify the basis of the engagement and incorporate relevant assurances to comply with the Department of Health guidelines.
- A standard ‘Due Diligence’ approach for use when taking on suppliers – We would recommend a standard checklist is introduced as evidence that engager does undertake a thorough ‘due diligence’ approach before contracting with a new supplier.
Having an auditable process to decide whether or not someone should be on the payroll will safeguard employers when HMRC next visit.
We have also launched a dedicated online service where we can offer accurate IR35 reviews free of charge. Click here to find out more information.
Please do not hesitate to contact us for help on this or any other employment tax matter.