Off payroll, working in the public sector
The Government have announced their intention to tighten up the use of workers off payroll within the public sector and issued a detailed consultation document on the 26 May 2016. This is aimed at those who offer their services to the public sector via a personal service company. The consultation period ended on the 18 August 2016 and we are expecting an announcement in the autumn statement of changes to the rules which will come into force at April 2017. It is likely that following this introduction we can expect to see similar rules introduced for the private sector.
Over recent years we have seen a number of changes to the tax rules relating to the engagement of workers and it is clear that the Government wish to act to avoid any practices which do not fall into line with their overall tax strategy:
In 2014 we saw the introduction of the intermediary tax rules which require tax and National Insurance to be applied on payments made to workers. The responsibility sits with the intermediary unless they are not resident for tax purposes in the UK when the responsibility sits with the end client. These rules apply when there is 'supervision, direction or control' within the contract;
In 2016 we saw the tightening of the tax rules to travel and subsistence to limit the expenses that could be claimed by those engaged via an umbrella company. The rules really limit the expenses for tax purposes to what could be claimed if that worker was directly engaged via the end client;
In addition the Office of Tax Simplification was engaged in writing a report with recommendations over 'false self-employment'.
In light of the tightening of the screw in various opportunities to benefit from being engaged off payroll there was always the view that it would simply encourage more workers to move to set up a personal service company and reap the possible tax advantages that could arise. It is therefore not surprising to see proposals to clampdown on some of those who are using these arrangements. It is also worth noting that the public accounts committee has not been impressed at the track record of HMRC of clamping down on what is considered abusive practices. It is fair to say though since that rebuke HMRC have been more proactive in challenging those engaged via personal service companies who have incorrectly filed their tax computations without accounting for any IR35 adjustment and the recent case against Costelioe Business Services over the managed service company rules.
Why start with the public sector?
Leaving aside all the other factors which will be considered it is clear that the Government want the public sector to be whiter than white in complying fully with the UK tax requirements when it comes to the engagement of workers.
In February 2012 the Government was embarrassed at the revelations that the CEO of the student loan company had been engaged via a personal service company. This story resulted in revelations of others being engaged off payroll. This lead to a HM Treasury review with announcement in May 2012 that found 2,400 workers had been engaged off payroll in the public sector and of this number 85% had been engaged for a period in excess of 6 months. This review recommended that the tax treatment of public sector appointees was:
that for Board members and those with significant financial responsibility that they had to be on payroll unless in an exceptional circumstance the accounting officer sought assurance on the tax and National Insurance position before signing off;
if the worker was below Board level but earning in excess of £220 per day and engaged for a period in excess of 6 months the right to assurance be built into their contractual provisions which allowed departments to terminate the contract if assurance was not received when sought;
if the worker was engaged for in excess of 6 months but earning below £220 per day departments had to determine where contractual provisions and assurance may be appropriate.
The recommendations introduced on departments that did not comply with sanctions which reduced departmental budgets by up to 5 times the payment in question.
It is our experience that certain public sector bodies have struggled to police those they engage seeing in many cases the payments are made to intermediaries and they do not know the basis of the contractual position between them and the worker. It is clearly the case therefore that these 2012 rules do not achieve what was wanted and there is need for something more robust.
What are the proposed changes at April 2017?
The changes will impact on the following public sector organisations:
- Government departments, executive agencies and non- departmental public bodies
- Police and fire authorities
- Local authorities
- Devolved administrations
- Educational establishments including universities
- BBC, Channel 4
- The Bank of England
When engaging a worker via a personal service company, these departments will need to consider whether 20% or more of the contract value relates to the cost of materials to be used in the assignment. If the answer is yes then that particular company falls outside the new proposals and they can be paid gross. If however, the value of the materials is below 20% then the engager will need to consider the employment status of the individual and specifically whether they:
- are required to do the work themselves? and
- decide or have the right to decide how the work should be done?
If the answer to both questions is 'yes' then the public sector body will need to account for tax and National Insurance on their payments to that worker’s personal service company. In other cases the engager will need to work through a new digital tool to determine whether payments can still be paid gross.
If the worker is provided by a UK Intermediary then the responsibility to undertake these tests will sit with them and they will be required to account for the tax and National Insurance.
If a worker disagrees with the decision arising from the new digital tool then they have the right of appeal to HMRC.
It is proposed that any tax or National Insurance deducted will be offset against the liability of the personal service company. How this will work in practice is yet to be explained.
The comments arising out of the consultation process was concern that the new digital tool was still to be produced and therefore no real evidence of how it will work in practice.
It can only be expected that we will see a mirroring of these rules into the private sector at a later date.
What will be the impact on accountants involved in managing the affairs of personal service company?
There is every likelihood that on undertaking this new procedure the public sector may come to the view that there are some historical workers who have been engaged via a personal service company who should be directly employed. Also those individuals who fail the new digital test and so face having tax and National Insurance withheld on payments they receive may decide that it makes little sense going forward to be engaged on this basis and move to an employed contract. Therefore there may well be a reduction in workers who need accountancy/tax assistance going forward because they moved to be an employed worker.
There may be room to assist some clients in disputing the outcome of the digital test or ensuring there is a clear and accurate understanding of their contractual position with their public sector client.
In addition this new process is likely to provide individuals who given the basis of their contractual position should have accounted in their tax computations under IR35. From experience despite IR35 being with us since 2000 there is still significant ignorance over when it actually applies. There are clearly going to be a number of cases in which the need to make the necessary adjustments under IR35 occurred resulting in a claim for back tax, National Insurance, interest and penalties. In light of the change at April 2017 it would be sensible to undertake a risk review to ensure their particular clients are not at risk of HMRC challenge. I am expecting the results of this change to lead HMRC to recover significant sums do to the misunderstanding of the historical rules.
If you would like to speak to someone about Making Tax Digital or cloud accounting please contact your local office or send an enquiry as we are interested in discussing this with you.