HMRC published a Technical Note on Off-payroll working in the public sector on 5 December, the same day the draft legislation was issued. In this blog post we begin by looking at some of the questions which remain unanswered, before the addendum at the end of this article considers the key issues contained within the Technical Note.
Who actually is liable for making the status decision?
The draft legislation is clear in Income Tax (Earnings and Pensions) Act 2003 at Chapter 10 Part 2 61S, which is that the responsibility lies with the public sector client, but this is not what paragraphs 6, 8 and 14 of the Technical Note suggest.
When we approached the Off-payroll unit within HMRC for confirmation that it is the public sector body, it responded:
“Not quite. The decision remains legally with the person who is liable – the agency or third party. What this is, is an information power – but with teeth.
We listened to what agencies and third parties (particularly accountants and contracting specialists) told us about the difficulty they would have in some cases in knowing whether the worker would meet the conditions for liability. Specifically they said there were occasions where they would not know sufficient about the way the worker was engaged, particularly whether the person could genuinely send a substitute or the extent of control the client required. Agencies told us that without some punitive element, the public sector client could not be trusted to send them the information.
The result is a provision so that the agency or third party has an effective statutory right to require their client to advise them whether they believe the worker is inside or outside the scope of the legislation. The agency or third party must make the request in writing and the client then respond within 31 days. The penalty on the client being that if they fail to provide the help, they become liable.”
The lesson here appears to be that an agency (or other third party) needs to ensure that it has received sufficient explanation from the public sector body and if they haven’t, to ensure that they ask for it.
However, a practical point: in most cases, the end client (be they public or private sector) usually want the resource “yesterday”. If the public sector body waits most of the 31 days to respond to a request for information, then the contractor (and agency if there is one) is in limbo, not knowing how payment will be made.
What does the contractor do if they wish to appeal the decision?
There is also no clarity on appeals if the contractor believes that the decision is wrong. When asked, HMRC responded:
“There is a right of appeal against the decision as there is with any status decision. It is the same as for directly engaged workers. The person should seek to resolve with the person hiring them if they disagree with their assessment.
Ultimately, if they think that tax has been over deducted they can make a repayment claim and if HMRC rejects that claim and they continue to disagree the matter can be resolved with a formal determination/decision and appeal to the Tribunal.”
We’ve already considered the potential problems of having to wait days or weeks for a status decision from the public sector body, but now we could have a position where the matter drags on still further as each side makes their representations. Realistically, those contractors with transferable skills will vote with their feet and find another role.
The second option leading to an appeal to Tribunal will be interesting. How will HMRC cope if a lot of contractors do make repayment claims? We weren’t the only organisation to respond to the consultation to warn there would be a lot of additional work for HMRC if such a process came in.
But if the matter goes to Tribunal, this won’t just be a test of the engagement, but also the robustness of HMRC’s Online Status Service (assuming it is used because its use is voluntary). And what happens if it doesn’t pass muster? How will public sector bodies then determine status?
What about those firms who previously had their tax assurances accepted, but now find themselves caught by IR35?
There are two issues here: in Part 4 Commencement and noted in paragraph 2 of the Technical Note. This affects not just contracts entered into on or after the 6th April 2017, but payments made. So, having had agreement the current engagement is outside of IR35, the PSC submits a timesheet for March which is signed off and then the related invoice is submitted and paid after 6th April, someone has to determine that these rules apply. What if they are deemed to apply when your existing contract was not deemed caught?
The second issue is related. What if, as many are suggesting, the line of least resistance is taken and all engagements are deemed caught from the 6th April; will there be an attempt to look at the engagement retrospectively? One can see why there might be concern, but there appear to be some valid arguments against why that is unlikely.
Firstly, the tests were different: mutuality of obligations was still a status test (and as far as the courts are concerned it still is) and HMRC’s online status tool didn’t exist. So, unless fraudulent information was provided previously, it would seem unfair to judge the past on the basis of new rules.
Secondly, the public sector body would have to provide evidence to argue why it accepted the previous assurances.
Whilst we accept that there are no guarantees, it seems unlikely that HMRC would (have the resources to) undertake a retrospective exercise across the board.
What if HMRC challenge the ‘not caught’ decision at a later stage?
We would like to understand what the position will be if a public sector body uses HMRC’s Online Status tool and determines that an engagement is ‘not caught’ by IR35. This would result in the PSC being paid gross.
But, at some point in the future, what if HMRC challenges that decision (whether that is by doing a random check that the public sector body is determining status correctly or an IR35 enquiry into the PSC itself)? Although the legislation indicates that the public sector body or agency would be liable, but in the event of an IR35 investigation into the PSC, would HMRC seek to recover the tax from the PSC, as they do now? After all, to let the PSC be paid gross and then penalise the public sector body which has acted in good faith does not appear to be entirely equitable.
So, there are a lot of unanswered questions and perhaps the promised HMRC guidance will answer these. In the meantime, we as interested parties have until 30th January 2017 to comment on the draft legislation; but more importantly, we feel HMRC have a duty to get answers to all of the remaining queries, and well before 6th April.
Addendum: Summary and Commentary of the Technical Note
We have summarised the key paragraphs of the Technical Note and added commentary in red, some of which is taken from the summary of the consultation response found via this link. We have undertaken this exercise because we were concerned there is a lack of clarity in the Technical Note regarding who determines the status of an engagement.
||Technical Note in Black / Commentary in Red
||The reform of the Intermediaries Legislation (IR35) will be undertaken by introducing a new Chapter 10 Part 2 ITEPA 2003.
In the consultation it was noted that most respondents saw the need for reform. Based on the list of respondents and their known views, it was unlikely that this outcome was the one most sought. However, it was noticeable that there were almost 40 public sector respondents who didn’t respond to last year’s discussion document. How might this have influenced responses?
||The measure is effective 6th April 2017 and will affect contracts entered before that date – even where the work ends before 6/4/17, but payments are made on or after that date.
||Off-payroll working in the Public Sector moves the responsibility for deciding if the off-payroll rules apply to the public authority, agency or third party paying the intermediary.
This suggests that an agency or other third party might have to make the decision on status.
||· The “fee payer” which is the public authority, agency or third party paying the intermediary, decides if the rules applies and then deducts tax and primary (employee’s) NICs from the payments AND pays employer NICs.
· The amount payable is included for calculating the Apprenticeship Levy (which also comes in in April 2017); the Apprenticeship Levy and is calculated as 0.5% of the payroll amount.
· The VAT exclusive amount is calculated via RTI.
· This change does not affect employment rights.
Paragraph 8 of the Technical Note also confirms that an agency or other third party – if they are the “fee payer” – could have to make the decision on status. This is repeated in paragraph 14.
||The PSC can offset an amount equivalent to the Tax and NIC deducted from payments made to the PSC by the fee payer.
||5% deduction for notional expenses removed but business expenses still allowable.
Apparently, there was a strong call from respondents to remove the 5% allowance. That certainly didn’t come from contractor representatives (as the document notes), but the reasoning that “PSCs will no longer bear the administrative burden of deciding whether the rules apply” seems weak at best.
The fact that business expenses can be claimed means that this will be another difference between the public and private sector.
||This measure applies to payments on existing contracts made from 6th April 2017. Therefore, public authorities, agencies or third parties paying the intermediary need to start making arrangements now.
The Government response in the Consultation merely states that “HMRC will be providing guidance prior to the implementation in April, which will help affected stakeholders to prepare.” Yes, but when?
||Does not create new pension obligations.
||Further confirmation that not just public bodies, but agencies and third parties supplying workers to the public bodies will now have to decide if the rules apply and tax and NICs liability in respect of the payments they make to the worker’s intermediary.
||Office holders are caught.
||“Normal” IR35 rules continue to apply in private sector.
||A public authority as defined in para 25 includes government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service.
||According to the Technical Note, the new legislation in Chapter 10 uses the same employment tests…
Yet all references to Mutuality of Obligation have been removed.
||A new Employment Status Service is being provided by HMRC, but is currently being tested privately and will be made available for public testing before 6th April 2017.
Again, all the Government response can offer is that it will continue working with stakeholders over the coming months. This is an aspiration, not the certainty which the market needs.
However, the complex ‘gateway tests’ with the bizarre 20% materials test have been thankfully dropped.
||The public sector engager must inform the intermediary, agency, or third party with whom they have a contract whether or not the engagement falls within the new off-payroll rules. This conclusion can be included in the contract with the intermediary, agency, or other third party, or separately.
This paragraph would suggest that it is the public sector body which makes the status decision.
||If the public sector engager does not notify the intermediary/agency/3rd party the worker’s status then they can request in writing that the public sector body provides the necessary information and the reason for reaching the decision.
This again points to the public sector body deciding on status.
||The public sector client must reply to the written requests for a decision on whether the off-payroll rules are applicable or for the reasons why the client reached a conclusion within 31 days of receiving the request. If the public sector client does not reply to the request as to whether the off-payroll rules apply within 31 days they become responsible for accounting for PAYE.
The Government confirms in the consultation response that the engager – the public sector body – will be liable for the status decision. This conflicts with comments in paragraphs 6, 8 & 14. Clarity on this point is desperately needed – see below the table.
||The steps to calculate the deemed direct payment are set out below:
Step 1 – the amount of the payment less the amount (if any) of VAT.
Step 2 – deduct so much of that amount as represents the direct cost of materials used, or to be used up in performance of the services.
Step 3 – deduct an amount as represents expenses that would have been deductible if the worker had been the client’s employee and the expenses had been met by the worker out of those earnings.
Step 4 – If the amount is nil or a negative amount there is no deemed payment. Otherwise that is the amount of the deemed earnings payment.
||The worker is legally required to furnish NINO, tax code and identity details.
||This measure contains a provision against double taxation:
- the proposed legislation has an impact on the tax liabilities of the worker’s intermediary. Broadly speaking, the intermediary is able to set the amount of the deemed payment on which tax and NICs has been paid against the amount of remuneration from the intermediary on which tax liabilities arise.
- the corporation tax computation is also adjusted so that the intermediary cannot claim a double deduction for the costs associated with the engagement.
- the worker’s intermediary continues to be able to deduct certain pension related expenses and capital allowances under section 262 of Capital Allowances Act 2001.
||The new legislation will impose tax and NICs obligations, the Apprenticeship Levy applies to a person who must pay employer NICs and will therefore apply. Eligibility for Employment Allowance is also triggered by the payment of employer NICs. However, statutory payments and other employment rights are unaffected by the new legislation and are dealt with thus:
· Statutory Sick Pay – no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.
· Statutory Maternity Pay – PSC, but reclaimable from Exchequer.
· Statutory Paternity Pay – PSC, but reclaimable from Exchequer.
· Statutory Adoption Pay – PSC, but reclaimable from Exchequer.
· Statutory redundancy pay – no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.
· National Minimum Wage – no rights through the end-client or fee-payer.
· Worker rights – through the PSC as employer.
· Pensions auto-enrolment – no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.
· Paid annual leave – no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.
· Protection from unlawful deduction from wages – no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.
Pension contributions tax and NICs relief:
- public sector, post-reform, same as before, relief through own company
- pre-reform/private sector, full IT & NICs relief from Exchequer on PSC contributions.
Author: Paul Mason, National Contractor Manager