Policy paper

Off-payroll working in the public sector: changes to the intermediaries legislation

Published 8 March 2017

Who is likely to be affected

  • people working for a public sector organisation through an intermediary, such as a personal service company (PSC)
  • public sector organisations and agencies supplying staff working through PSCs to the public sector
  • other intermediaries such as partnerships may be impacted where engagements fall within the off-payroll rules

General description of the measure

The off-payroll rules (often known as IR35, or the intermediaries legislation), ensure that individuals who work through their own company pay broadly equivalent taxes as employees, where they would be employed if they were taken on directly.

This measure moves responsibility for deciding if the off-payroll rules for engagements in the public sector apply, from an individual worker’s PSC to the public sector body, agency or third party paying them. This measure also makes that organisation responsible for deducting and paying associated employment taxes and National Insurance contributions (NICs) to HM Revenue and Customs (HMRC). These changes do not affect workers and PSCs who provide their services to private sector organisations.

The 5% allowance currently available to those who apply the off-payroll rules to reflect the costs of administering the rules will be removed for those who work in the public sector. These changes will also introduce a requirement for public sector bodies to provide information to agencies and workers about whether engagements are within the off-payroll rules.

As a result of feedback received during the technical consultation, it will be optional for the agency or public sector body to take account of the worker’s expenses when calculating the tax due. This change would put these workers in the same position as other employees, whose employers can choose whether or not to reimburse the expenses they incur. The application of the rules to Parliament and Statutory Auditors will also be clarified.

HMRC will provide a new digital employment status service to help identify whether engagements fall within the off-payroll rules to support customers impacted by the reform.

Policy objective

These changes are being introduced to improve fairness in the tax system by ensuring that individuals are not able to sidestep employment taxes or NICs by working through a PSC. Removal of the 5% allowance reflects the transfer of responsibility for making a decision about whether the rules apply and deducting and making the associated tax and NICs payments.

Background to the measure

At Summer Budget 2015 the government announced that it intended to reform the off-payroll rules in response to widespread non-compliance. HMRC published a discussion document in July 2015.

After considering the issues raised during that discussion, the government announced proposals to reform the rules at Budget 2016. From April 2017, where a public sector organisation engages an off-payroll worker through their own limited company, that organisation, (or the recruitment agency where the worker is engaged through that agency) will become responsible for determining whether the rules should apply, and, if so, for paying the right tax and NICs.

HMRC consulted on the detail of this reform and the development of a new digital employment status service, between 26 May and 18 August 2016. HMRC carried out a further technical consultation between 5 December 2016 and 5 February 2017 on the draft legislation and regulations.

This tax information and impact note (TIIN) updates the TIIN published on 5 December 2016.

Detailed proposal

Operative date

This measure will have effect for contracts entered into, or payments made, on or after 6 April 2017.

Current law

Current law is included in Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Part 2 Chapter 8, sections 48 to 61, and the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000 No 727).

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to include a new Chapter in ITEPA 2003 and relevant NICs regulations, so that where an individual works for the public sector, through their own PSC and falls within the rules:

  • the public sector engager or agency is treated as an employer for the purposes of taxes and Class 1 NICs
  • the amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income, or of earnings for Class 1 NICs for that worker
  • the public sector engager or the agency is liable for secondary Class 1 NICs and must deduct tax and NICs from the payments they make to the intermediary in respect of the services of the worker
  • the public sector is defined using the definitions in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Acts
  • the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using Real Time Information

Summary of impacts

The impacts of this measure were set out in the TIIN published on 5 December 2016. However the figures below have been updated to include latest available costings, which have been certified by the Office for Budget Responsibility.

Exchequer impact (£m)

Off-payroll working: transfer liability to public sector employers (*including 5% allowance)

2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022
- +185 +105 +150 +170 +190

These figures are set out in Table 2.2 of Spring Budget 2017 as ‘Off-payroll working: transfer liability to public sector employers’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.

Off-payroll working: 5% allowance removal

2016 to 2017 2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022
- +20 +15 +15 +20 +20

These figures are set out in Table 2.2 of Spring Budget 2017 as ‘Off-payroll working: implement consultation reforms’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

These changes are being introduced to improve fairness, the measure is not expected to impact on households, family formation, stability or breakdown.

Equalities impacts

This change is not expected to have a disproportionate impact on any group with a protected characteristic. The group impacted by this change are more likely to be men.

Impact on business including civil society organisations

This measure is expected to impact on public sector organisations who engage off-payroll workers and agencies supplying workers to the public sector. To ensure that individuals cannot side-step employment taxes the reform will transfer the responsibility to consider whether the intermediaries legislation applies from PSCs to public sector engagers and agencies who pay workers engaged in the public sector.

Where the intermediaries legislation applies the engager or agency will be responsible for deducting tax and NICs payments from payments made to the PSC and remitting them to HMRC. There will be a consequential impact on public sector organisations, who will now have to consider whether the intermediaries legislation applies to their workers.

Affected businesses will incur one-off costs for familiarisation with the new rules and putting in place processes to share information between procurement and payroll sections. Ongoing costs for accounting and reporting through Real Time Information and using the digital tool are expected to be negligible. The costs are set out in the table below.

The government estimates that this measure will also affect around 30,000 PSCs. Administrative costs currently incurred by compliant PSCs in calculating tax and National Insurance will now move from the PSC to the public sector organisation or the agency supplying the worker to the public sector.

Small and micro business assessment: smaller agencies may be disproportionately affected by familiarisation costs if they provide workers to the public sector. The measure will require them to place the employee on a payroll. These costs to smaller agencies may be significant however there are also likely to be overall savings for affected PSCs of £300,000 per annum.

Estimates of compliance costs are shown in the tables below:

Estimated one-off impact on administrative burden (£m)

One-off impact (£m)
Costs negligible
Savings -

Estimated on-going impact on administrative burden (£m)

Ongoing average annual impact (£m)
Costs 0.6
Savings -0.9
Net impact on annual administrative burden -0.3

Operational impact (£m) (HMRC or other)

HMRC will incur IT costs in the region of £1 million as a result of this reform. However there will be associated operational savings from implementation.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the Employment Status Policy team at: consultation.off-payroll@hmrc.gsi.gov.uk.