Those who use external contractors in the public sector need to be aware of the forthcoming changes to IR35 rules. These rules, which apply to off-payroll working, are changing to mean that those who provide work through an intermediary will pay tax in a similar way to employees for payments made on or after the 6th April 2017.
The new rules apply when a worker is personally performing a service for a public authority through an intermediary where, if the contract was directly between the individual and the client, the worker would be regarded as an employee of the public authority for income tax purposes.
In the past, end clients did not have to consider whether their workers were IR35 compliant or not, but since 2012 public sector bodies have had to take a proactive stance. Under the new rules this goes even further and public sector bodies are now responsible for determining the status of their workers operating through a limited company.
Where the legislation does apply, the public authority paying the fee will have to calculate income tax and employee National Insurance contributions and pay these to HMRC. These will be deducted from the fee agreed for the service.
The worker themselves will have to provide the employer with enough information for them to be able to determine whether the off-payroll rules apply or not. The government has produced an Employment Status Service tool to help employers. The tool asks a number of questions and then provides the HMRC’s view of the employment status of the worker. Whilst the tool may be useful, it is optional and there is a caveat that the HMRC will not be bound by the results of the tool. Therefore, it is ultimately up to the public authority employer to correctly determine the status of the worker to decide whether the IR35 rules apply.
Where the off-payroll working rules apply, the individual will be taxed as if they were an employee but their status for employment rights purposes will not be affected. This means the individual will not gain employment rights such as pension contributions, minimum wage and unfair dismissal, regardless of how their tax is paid.
Payroll Advice Team Leader, Richmal Price, says of these developments: “This measure is one of many that the Government are taking to simply increase the funds available to it. It does mean, however, that public sector authorities will have to take on extra responsibility for checking contractors’ status, for example, locum care & social workers providing their services through a limited company”.