Off-payroll working in the public sector: reform of the intermediaries legislation
Published 5 December 2016
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This publication is available at https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation
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 PSC’s 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 employment taxes in a similar way to employees, where they would be employed were it not for the PSC or other intermediary that they work through.
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. The measure also makes that organisation responsible for deducting and paying associated employment taxes and National Insurance contributions (NIC’s) to HM Revenue and Customs (HMRC). This change does not affect workers and PSC’s 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.
HMRC will provide a new digital tool 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 NIC’s by working through a PSC. Removal of the 5% allowance will simplify the administration of the reformed rules and reflects the transfer of responsibility for making a decision about whether the rules apply and deducting and making the associated tax and NIC’s 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 summer 2015.
After considering the issues raised as part of that discussion, the government announced at Budget 2016 that, from April 2017, where the public sector engages an off-payroll worker through their own limited company, that body (or the recruiting agency if the public sector body engages through one) will become responsible for determining whether the rules should apply, and for paying the right tax.
HMRC consulted on the detail of this reform and the development of a new online tool between 26 May and 18 August 2016.
Detailed proposal
Operative date
The 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 to ITEPA 2003 and relevant NIC 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 NIC’s
- 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 NIC’s) for that worker
- the public sector engager or the agency is liable for secondary Class 1 NIC’s and must deduct tax and NIC’s 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
- the 5% allowance intended to be used by the worker’s intermediary for certain business expenses is removed, for those contracts with the public sector. The worker’s intermediary will still be able to claim allowable business expenses
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| - | +265 | +65 | +105 | +120 |
These figures are set out in Table 2.1 of Budget 2016 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. There will be revisions to these figures which will be set out in Table 2.2 of Budget 2017.
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| - | +25 | +20 | +20 | +25 | +25 |
These figures are set out in Table 2.1 of Autumn Statement 2016 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.
The costing accounts for a behavioural response whereby some of those affected may cease to operate as the owner/director of a limited company.
Impact on individuals, households and families
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 have a significant initial impact on public sector organisations who engage off-payroll workers and agencies supplying workers to the public sector. It will transfer the liability to consider whether the intermediaries legislation applies from personal service companies 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 NIC 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 26,000 personal service companies. Administrative costs currently incurred by compliant PSC’s 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 this change if they provide workers to the public sector. This measure will require them to place the employee on a payroll. These costs to smaller agencies are expected to be significant. However, there are likely to be overall savings 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 Information Technology costs in the region of £1million 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 keep 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 via email: off-payroll.consultation@hmrc.gsi.gov.uk.