The Government announced in the 2016 Budget that they were to reform the intermediaries’ legislation for public sector engagements. For Multiple Academy Trusts, Academies and Schools this has serious implications if you engage individuals who work through their own Limited Company.
What is Off Payroll working (or IR35)?
The intermediaries’ legislation, commonly referred to as IR35, was introduced in 2000. It requires individuals working through their own Limited Company (an intermediary) to pay broadly the same amount of tax and National Insurance Contributions (NIC) as employees.
IR35 applies in situations where the individual would have been an employee if they had provided their services directly.
If you engage self-employed workers, this guidance does not affect your responsibilities. You should previously have considered employment before making payments to self-employed workers, and should continue to do so.
What changes from April 2017?
The responsibility had, up until 5 April 2017, always fallen on the individual worker to consider whether IR35 applied and whether their earnings should be subject to tax and NIC.
However the revised legislation places the responsibility fairly (or not) and squarely at the door of public bodies to ensure that people working for them are paying the correct amount of tax and NIC.
What is a public body? A public body for the purposes of the revised legislation is any organisations that are Public Authorities for the purposes of the Freedom of Information Act (FOI) 2000.
The FOI defines the public sector under very broad categories to ensure a catch all position. Those categories are:
- Government Departments, armed forces
- Local Government
- Schools and further and higher education institutions
- Other public bodies
- Publicly owned companies
So all education establishments (except private schools) are therefore caught by this legislation.
What do you need to do?
Put simply, consider the employment status of all Limited Companies that you engage.
To do this you will need to:
- Review all contracts with intermediaries and advise the worker whether the new rules apply or not
- If the new rules do apply, deduct income tax and NIC
- Pay the balance after deduction to the worker
- Pay the tax, employers NIC and employers NIC to HMRC
You will note that in addition to the deductions from the worker of tax and NIC, you will also be responsible for employers NIC. This will increase the cost to you of engaging the worker by 13.8%, a cost that you may not have budgeted for.
A further budget consideration will be the Apprenticeship Levy, if your payroll costs exceed £3 million per annum.
How will you know if an engagement is covered by the revised legislation?
HMRC have an online tool called Check Employment Status for Tax (CEST). This tool has always been available for employers to clarify employment status issues. However HMRC have updated the ESI to provide employers engaging incorporated workers with a ‘real-time’ HMRC view. This will help employers decide whether or not the intermediaries’ rules need to be applied.
The outcome of the tool is of course dependent on the information that is fed into it. The questions arising from the ESI will be based on the 3 factors that have arisen out of long standing employment and tax tribunal cases.
These 3 factors are:-
- Control. What control does the engager have over where, when and how the work is done?
- Substitution. Can a substitute be sent in place of the worker?
- Mutuality of Obligation. Are you as the engager obliged to offer work, and is the worker obliged to accept the work?
Do not rely solely on CEST
The CEST, will give the engager HMRC’s view of the correct tax treatment.
However although the 3 factors are integral to employment status considerations, CEST concentrates on Substitution. Substitution is not the be all and end all. If there is no mutual obligation for the worker to accept work and the engager to offer work, there cannot be employment.
If the engager does not have control over how the work is done, employment cannot be appropriate.
CEST, although being a useful tool for considering employment status, is slanted in favour of employment, because of the narrow band in which its programme operates.
In some cases CEST will state ‘the worker’s employment status cannot be determined by this system’. HMRC’s guidance in such cases is to contact the HMRC Status Customer Service Team. A word of caution, HMRC may not provide an opinion of the employment status. The responsibility will always lie with the engager.
However, CEST should not be used in isolation. The full terms and conditions of the engagement must be considered. This will include a detailed review of any contract for service
As you can now see, assessing employment status is very much subjective and it is quite conceivable that two people can come to a different conclusion on the same set of facts!
What if IR35 is applicable?
Basic information is required to enable you to process the payment through the payroll system. Such details include;
- Full name of the individual (not a limited company if the invoice is from a company)
- National Insurance Number of the worker
- Date of Birth of the worker (this is required to ascertain if Class 1 National Insurance is appropriate)
- Address of the worker
- Ask the worker to sign a ‘Starter Declaration C’. For workers working through their own Personal Service Company (PSC), the worker will have primary employment through their own company. Consequently they will have ‘other employment’ and therefore tax code BR should be operated.
PAYE and NIC must be deducted. However is this on the full amount of the invoice? No. These are the steps to follow;
- The starting point is the invoice amount net of VAT
- Deduct any amounts that relate to materials specific to the work undertaken
- Deduct any expenses that have been incurred wholly, exclusively and necessarily for the work undertaken
- The resulting figure is the deemed payment for payroll purposes
What if deemed employment is not appropriate?
It is imperative that an audit trail is retained as evidence that the engager has carefully considered the employment status. If CEST has been used, a print out from the system must be retained.
CEST is only as reliable as the information collected. It is important that the questions answered actually reflect the work undertaken.
Do you need to act now?
This has been a major change to employment status. Get the status wrong and HMRC will seek tax and NIC from the engager, whether the worker has declared the income or not. The responsibility for assessing the employment status rest with you, the engager, not the worker.
Having worked with Employment Status for over 25 years, I expected to be inundated with queries from Academies and Schools in respect of Off Payroll Intermediaries. This has not materialised which does concern me. Why?
Well I think that most Academies ad Schools either are not aware of the changes to employment status or are sweeping this under the carpet in the hope that they never get a HMRC visit.
This is dangerous territory as HMRC will go back 4 years and recover tax, NIC, interest and penalties if they find that a worker is caught by the legislation.
I have had discussions with some school Business Managers regarding such workers. The managers have said that the worker has told them they are not caught by IR35 or are resisting deemed employment because they will receive less money than has been invoiced. Therefore they have maintained the status quo and paid the worker on invoice.
Business Managers must not be swayed by what the worker (or their accountants) may tell them. The responsibility lies with them to consider and decide on the employment status.
For further information or you consider that a status review would benefit you and ensure compliance with the new legislation, please contact Paul Chappell on 03331 128000