Autumn Statement - IR35 Update by Toni Hall
The Draft Finance Bill 2017 was published on the 5th December and confirmed that the Chancellor is ploughing ahead with the ‘off payroll working’ changes, despite over 200 responses to the initial consultation.
The draft legislation raises a number of questions and we are working with REC and HMRC for clarity while the legislation is in draft stage.
What does the legislation say?
The Draft Finance Bill 2017 will introduce a new Chapter 10 into ITEPA entitled “Worker’s services provided to public sector through intermediaries”.
Which engagements will the new rules apply to? The new rules will apply where:
an individual personally provides services, or is under an obligation to personally provide services;
through an intermediary;
to a public authority (as defined in the FOI Act 2000) ; and
the individual either holds a “material interest” in the personal service company i.e. more than 5% of shares or, in the case of a partnership, is entitled to 60% or more of the profits of the partnership or in the case of an individual, payment can reasonably be taken to be for the individual’s services.
The new rules will apply to all payments made on or after 6 April 2017 including where services were provided before that date
In or out of IR35 – who decides?
The public body will have a statutory obligation to inform the intermediary (agency) whether the engagement is in or out of IR35. If the public authority does not tell the employment business whether the engagement is inside or outside IR35 the employment business may request written confirmation. The public authority must respond within 31 days of receipt of the request. If it doesn’t respond within that time then the public authority becomes liable to make the necessary tax and national insurance deductions. In addition, there will be an expectation that the intermediary is informed by the public body if the engagement changes over the course of the contract, which may impact on its IR35 status.
The intermediary will however be held liable if the information provided to them is incorrect and the sanction will be ‘failure to operate PAYE’ penalties.
If the engagement is “inside IR35”, then the party which has engaged with the intermediary i.e. the employment business or the public authority where they have engaged directly, must put the individual supplied via the intermediary on its own payroll, deduct tax and national insurance, pay employers’ national insurance and report on the payment via Real Time Information. This balance paid to the intermediary will be called the “deemed direct payment”. By having to pay employers’ NICs this payment will be included in the calculation of the employment businesses’ or public authority’s apprenticeship levy bill.
HMRC has stated repeatedly that the requirement to deduct tax and NICs does not mean that the individual supplied will have the right to statutory payments such as statutory sick pay, maternity pay, redundancy, pensions or certain employment rights from the paying organisation (whether the employment business or public authority) – though they may claim some of these from the personal service company or partnership in certain circumstances.
The online tool
HMRC advised in a meeting at REC on 12/12/16 that the public beta test site (the one we will all have access to) will not be ready until the end of February at the earliest. The legislation is enforced just a month later.
If you are an ‘office holder’ or on the board, the tool will automatically find you to be inside IR35 and the contract will have to be on payroll, taxed at PAYE levels. These payments can be made to your Ltd Company.
Those assignments that truly operate under no supervision, direction or control, and is not part and parcel of the organisation, SHOULD be deemed outside IR35. However, we can assume that many clients will automatically assume all assignments fall within IR35. We will need to work with clients on their job briefs, their understanding of IR35 rules and the questions in the online tool.
The current version (there have been many iterations to date) has a number of ambiguous questions which could be answered in either way depending on the user’s interpretation of those questions.
What Penna is doing
The Chief Executives, Leaders of Councils and HR departments we are in regular contact with have made it clear they will still need flexible interim support through this time of significant change. We will be working with our clients to help them define their resourcing solutions post April 2017 to ensure they still have access to the talent they need. We will also hold roadshows in the New Year for our clients and interims to discuss the changes and plans of action. In our recent survey, 43% of you said that you will reconsider working as an interim manager. Many of you have indicated that you will continue, however your rates will go up to cover the extra tax. We will provide regular updates to our interims as our business adapts to the changes and discuss our plans and your options with you.