We are already seeing a much less flexible interpretation – in particular from government departments – of the ‘off payroll guidance’ which requires the Public Sector to have assurances from the contractors it engages that they are paying the ‘right amount of tax’. More and more, this seems to be interpreted as the contractor should be taking their income as PAYE or applying the deemed calculation; i.e. treat the engagement as caught by IR35.
And the direction of travel has been heavily signposted since the Autumn Statement in November 2015. In the December IR35 Forum minutes (available here) HMRC stated that they had plans to have an IR35 specific ESI online tool ready for testing this spring. It will be interesting to see how this is operated because how the questions are phrased and answered will be the key to determining whether or not it is a useful indicator tool.
The potential of this ESI tool for the Public Sector has been established in a Technical Note issued by HMRC as part of Budget 2016 which can be viewed here. HMRC wishes to consult on proposed changes which will make organisations in the Public Sector responsible for deciding whether IR35 applies with effect from April 2017.
This will affect:
- Government departments, legislative bodies, armed forces;
- Local government;
- NHS; Police; Schools and further and higher education institutions;
- Other public bodies (listed in a Schedule including bodies such as The British Museum, BBC, Channel 4); and publically owned companies (wholly owned by the Crown and/or the wider public sector such as Transport for London)
The new rules will make Public Sector engagers, or the third parties who engage workers through Personal Service Companies (PSCs) on their behalf, responsible for determining whether the Intermediaries Legislation (IR35) applies and then collecting the relevant tax and NICs.
Where the Public Sector organisation engages the worker indirectly through the third person (an agency) that third person is responsible for operating the new rules and collecting and paying the relevant tax and NICs. The Public Sector body will also be required to check that the agency operates the rules correctly. However, these new rules won’t apply for workers provided through an agency or similar business where the workers are employees of the agency and not supplied through their own company.
There will be special rules for more complex contractual chains; e.g. a series of agencies, or when the liable agency or organisation is offshore, but in essence the party closest to the worker’s limited company in the supply chain will be required to comply with the rules.
To help engagers make the decision about the status of an engagement, HMRC say they will provide simplified guidance, including a digital tool to provide up front certainty – we assume that this will be the ESI tool mentioned in the Forum minutes. HMRC’s Technical Note states that answering the questions in the guidance and using the tools will give the engager HMRC’s view of the correct tax treatment – the question is whether this ‘view’ will be as seemingly biased as the manner in which some government departments are treating contractors at the moment.
The Technical Notes explains that the tax due if caught by IR35 will be ‘deemed payment’ and calculated as it is now, albeit HMRC want to consult on the detailed rules to ensure they remain as simple as possible to operate. The balance payable is then to be included for RTI purposes and returned to HMRC in the normal way. The engager should operate all expenses and other allowable deductions and allowances as if this were a normal direct employment. Responsibility for paying employer NICs on the deemed employment income will also shift from the PSC to the relevant engager and this new measure will require the Public Sector organisation or the agency engaging the worker on its behalf, to obtain the necessary personal, company and tax information needed to operate RTI from the worker’s PSC.
On page 3 of the Technical Note, HMRC make it clear that: “The existing intermediaries rules will continue as they are now for non-public sector engagements. Businesses and agencies working outside of the public sector will also be able to make use of the new digital tool.”
We wonder how long before ‘having access’ to the ESI tool will firstly become an ‘expectation’ that the private sector uses the tool; and then a ‘legal requirement’?
We will obviously await the consultation, as the devil will be in the detail. Nevertheless, the ESI Tool will be the key to this new approach: if the ESI is always going to point towards ‘caught by IR35’, it will be as unhelpful as one where contractors can manipulate the results. However, we believe that the real value for HMRC will be if when using the ESI tool that one has to enter a code which identifies the user. If it does and the answer is ‘caught’, then HMRC will understandably expect to see a deemed calculation being completed. If the deemed calculation is not made, then presumably this will trigger an IR35 enquiry; but does that mean the individual contractor is actually caught? Could an error have been made? Could the contractor decide that actually new information has come to light that means that the engagement isn’t actually caught?
Without a contract review, the contractor isn’t going to know the answer to these questions and without fee protection; the contractor isn’t going to be able to fund what could be a very expensive defence – particularly if it goes to tribunal. Please contact us to see how Abbey Tax can combine due diligence, protection and even tax losses insurance for your freelancer and consultancy clients.
Author: Paul Mason, National Contractor Manager
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