Article originally published on 22 February 2017. Updated 8 March 2017 to take account of new HMRC employment status service.
In April 2017, the government is reforming the taxation arrangement for public sector ‘off-payroll’ working – i.e. engaging individuals to undertake work for a client through an intermediary; usually, a Personal Service Company (PSC).
What is the current position?
Existing arrangements with individuals engaged through PSCs usually place no obligation on the engaging organisation to decide the employment status of that individual and neither is there any requirement to deduct tax or National Insurance contributions from payments for services purchased. Off payroll workers assess their own employment status and account for their own tax and National Insurance.
Existing arrangements for off-payroll working are set to change this year. For payments made on or after 6 April 2017, responsibility will shift to the public sector organisation, agency or other third party paying the worker’s company to:
- determine whether employment taxes and employers’ National Insurance contributions should be made from payments for services provided by individuals; and
- make the appropriate deductions and pay Her Majesty’s Revenue and Customs (HMRC).
Payments must be made if a worker:
- is personally providing services to a public authority; and
- would, except for the use of an intermediary company, have been considered an employee or office holder.
The amount paid by the engaging organisation (or agency or other third party) can then be off-set by the worker when calculating their own employment taxes. In other words, there is no ‘double recovery’ by HMRC.
Who is covered?
All public authorities, as defined in the Freedom of Information Act 2000, including
- government departments and their executive agencies;
- many companies owned or controlled by the public sector;
- local authorities and parish councils; and
- NHS organisations.
What is excluded from the new arrangements?
- Payments made before 6 April 2017 (even if the work is undertaken after 6 April 2017). But note that the new rules will apply to work undertaken before 6 April 2017, if payment for that work is made on or after 6 April 2017.
- Private sector organisations (for the time being)
- Fully contracted-out services delivered in the public sector.
- Work undertaken by individual engaged through an agency which has operated PAYE and NICs on earnings it pays to the worker.
- Payment for work undertaken through a Managed Service Company structure.
Further information and guidance
The draft provisions for the legislation implementing this reform, the Finance Bill 2017, are available here, along with draft explanatory notes.
Please click here for the government’s technical note on this development, which includes detailed guidance and worked examples.
HMRC has published a new online tool to assist workers, end-clients and employment agencies with determining employment status for the specific purpose of determining whether intermediaries legislation applies. HMRC has said that it will honour the result produced by the checker, unless it is later shown that the information provided was incorrect. The online tool can be accessed here and the results are anonymous and are not stored. However, it would be prudent to treat the results with some caution as the approach appears to be much more simplified than the detailed employment status guidance published by HMRC.
How we can help:
- a review of your current arrangements in the light of the changes;
- specialist employment tax advice;
- advice on mitigating the risks of these changes, including putting in place appropriate indemnities and re-structuring arrangements to limit your exposure.