Off-payroll working in the public sector: reform of intermediaries legislation
Changes to the way intermediaries legislation (IR35) is applied to off-payroll working in the public sector from 6 April 2017.
Intermediaries legislation changes
From April 2017 there are changes to the way the current intermediaries legislation (known as IR35) is applied to off-payroll working in the public sector. Where the rules apply, people who work in the public sector through an intermediary will pay employment taxes in a similar way to employees.
How the reform works in practice
The responsibility for deciding if the legislation should be applied, shifts from the worker’s intermediary to the public authority the worker is supplying their services to.
Where the rules apply, the fee-payer (the public authority, agency, or other third party paying the intermediary) will calculate Income Tax and primary National Insurance contributions (NICs) and pay them over to HMRC. These amounts will be deducted from the intermediary’s fee for the work provided.
Where a public authority employs a worker through an intermediary, it decides if the off-payroll working rules for the public sector apply. If the rules apply, the fee-payer deducts the associated Income Tax and NICs from the employee’s salary and pays them to HMRC.
The worker’s intermediary is able to set against its own Income Tax and NICs liability in the tax year, an amount equivalent to the Income Tax and NICs deducted from payments to it from the fee-payer.
Who the changes affect
These changes will apply to:
- public authorities who hire off-payroll contractors
- public sector tax managers, payroll managers, human resources managers and procurement managers
- agencies and third parties who supply contractors to the public sector
- contractors who provide their services to a public authority through an intermediary
For the purpose of this reform, a public authority means a public authority as defined for the purposes of the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002.
This definition covers government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service (NHS). The Acts cover England, Scotland, Wales and Northern Ireland. Some cross-border public bodies in Northern Ireland are outside the Freedom of Information Act 2000.
When the changes will happen
The reform applies to payments made on or after 6 April 2017, including payments made for contracts entered into before that date.
Where work is completed before 6 April 2017 but the payment is made on or after 6 April 2017, the rules will still apply.
The key responsibilities are split as follows.
Worker working through Personal Service Company (PSC) or other intermediary:
- provide the fee-payer (public sector client, or agency, or other third party) with the information they need to help determine whether the off-payroll rules should apply
- where the off-payroll working rules apply, provide the fee-payer with the information required to allow them to deduct tax and NICs from the payment they make to the intermediary
- reporting to HMRC on own, and company’s tax affairs
An agency, third party or public authority where they are acting as fee-payer:
- operating employment taxes associated with the contract
- paying the deemed direct payment to the PSC
- reporting to HMRC through Real Time Information (RTI) the employment taxes deducted
- paying relevant employers’ NICs
- determine whether off-payroll working rules should apply initially and when there are contractual changes, as the party engaging the worker for a specific task or role
- where using an agency or other third party to provide labour, notifying them whether off-payroll working rules should apply to the contract they have with the worker
- where it does not reply to the written request from an agency or other third party as to whether the off-payroll rules apply within 31 days, becoming responsible for accounting for PAYE as if it were a fee-payer
What can be done before 6 April 2017
Public authorities, agencies and third parties supplying contractors should consider existing contracts and prepare for the change.
It is for the public authority to determine whether off-payroll working rules apply when engaging a worker through a PSC.
Employment Status Service
Interested parties can use the Employment Status Service tool to obtain the HMRC view of whether any current and prospective workers would fall within the off-payroll rules from 6 April 2017.
This new digital service provides the HMRC view of the employment status of a worker. The user answers a number of questions around the relationship between the worker and the public sector client they are contracted with. It is for the public authority to decide whether off-payroll working rules should apply.
The service is optional and is expected to be made available by the end of February 2017, and will replace the existing Employment Status Indicator tool. A link to the Employment Status Service will be provided on this page when available.
Determination of employment status
Where a worker’s PSC or other intermediary they work through has entered into the contract to provide the worker’s services to a public sector client, it is for the public sector client to determine if the off-payroll working rules should apply.
If a worker thinks they have been taxed incorrectly, they can submit a repayment claim to HMRC. HMRC will then determine if they are due a repayment of Income Tax or NICs and repay as appropriate. Please refer to guidance on tax overpayments and underpayments.
Support and resources
HMRC is currently making arrangements for support to customers to help them with these changes. More information will be published on this page before the changes are introduced.
Legislation, guidance and technical information:
- Income Tax – Draft legislation was published within Clause 1 and Schedule 1 of draft provisions for Finance Bill 2017 (PDF, 2.01MB) on 5 December 2016 for an 8 week consultation
- NICs – draft regulationswere published on 27 January 2017 for a 3 week consultation
- technical note about off-payroll working in the public sector published on 5 December 2016
- the HMRC employment status: employed or self-employed page has guidance to help employers and individuals decide the employment status of a worker, including information for employment