PAYROLL INSIGHT
Intermediaries in the public sector
In one of the most significant developments in the history of employment status taxation, legislation is being introduced from 6 April 2017 that applies specifically to public sector bodies. John Harling, employment taxes consultant at PSTAX, explains
D etermining whether an a long time – and will remain so – a sometimes complex area for all sectors. The engaging body is required to apply the so-called tests of employment status: whether there is a requirement to provide personal service; the level of control exercised by the engager; and whether the worker takes genuine financial risk. Failure to apply the correct treatment will result in the engaging body potentially facing arrears of income tax, National Insurance contributions (NICs), interest and penalty charges for the ‘deemed employer’. For many years, a number of workers provided services effectively as employees, but were outside the scope of the pay as you earn (PAYE) and NICs regulations because they operated through personal service companies (PSCs). Typically, these were one-person businesses where the worker was the sole (or main) shareholder, but who were effectively acting as employees of the engager. The PSCs would receive payments without deduction from the individual worker is employed or self-employed has been for
bodies that engaged them and then, typically, pay the director a dividend at a lower tax rate and without NICs. ...government has taken the view that IR35 is not working in the way that was intended In order to counter this, new rules – the ‘IR35’ rules – were introduced by HM Revenue & Customs (HMRC) in 2000 requiring personal service companies effectively to self-assess for PAYE/NICs broadly in the same way as if they had been directly employed. However, in recent years the government has taken the view that IR35 is not working in the way that was intended. Many PSCs have claimed to be outside the scope of the legislative requirements and have continued to deal with their tax affairs in the same way as before the changes were introduced. Also, the predicted increases in tax/NICs
revenues that IR35 was intended to bring have not materialised. At the same time, many high profile individuals working in the public sector through PSCs have caught the attention of the media. Treasury rules were introduced with a view to ensuring that government departments using PSCs sought guarantees that these bodies were applying the IR35 rules correctly, and the Department for Communities and Local Government issued guidelines about off-payroll working in 2015. However, they do not appear to have had the desired result and thousands of workers in the public sector have continued to work through PSCs and other intermediaries rather than being directly employed. After consulting on proposals to shift the IR35 burden from the intermediaries to the engagers for public bodies, it has been confirmed that new legislation will be brought in from April 2017 for this purpose. The new rules will apply where a worker provides services to a ‘client’ which is a ‘public authority’ via an intermediary body, e.g. a personal service company, partnership, agency or other
| Professional in Payroll, Pensions and Reward | April 2017 | Issue 29 16
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