The recent introduction of the updated Off-Payroll Workers (IR35) legislation for the Public sector which became law on the 6th April 2017 has caused much consternation for many project management practitioners involved in the supply of day rate labour. There has been a lot of noise, plenty of speculation, axe grinding and some really interesting observations. But now it is here, we thought it time to put together a simple (but quite lengthy) summary of our understanding of the legislation and how it will impact the workings here at Arras People.
As background, Arras People have been involved in the public consultation process with HMRC since the changes were first floated and have attended a number of sessions as well as providing 1:1 feedback and comment. This in itself proved be a really interesting insight into how Government departments go about taking an idea and pushing it through the legislative process. At times, it didn’t feel very consultative, but a number of key changes were achieved during the journey from draft to final legislation.
Why change IR35?
So, what are the changes about? Fundamentally it is about tax take, or from the HMRC’s point of view, a diminishing tax take, as fewer people in the UK are engaged in the traditional manner as real employees. The bean counters at the Treasury like employees as they have three taxes taken at source on a regular basis. Not only that, but the employers manage this process free of charge on behalf of the Government and provide a regular, monthly cash flow.
Those taxes being Employers National Insurance, paid by the employer; Employees National Insurance and everyone’s favourite, Income Tax or PAYE as you may prefer to call it.
So, the HMRC came to the conclusion that the existing IR35 legislation was protecting more than £500 Million per year and that 90% was through non-compliant interpretation of the rules. Thus, the Treasury were projecting that they would be missing out on over £400 Million in the tax year 2016/17, a situation that needed to be addressed urgently as the Government seeks to increase its tax take.
Who are the targets?
The HMRC indicated that they could see 20,000 public sector contractors who were “not paying the right tax” under the existing IR35 legislation, with many in fact being disguised full-time employees rather than bona fide contractors. However, with a constraint on the number of compliance cases that they could raise and manage (I was told a maximum of 250/year) something radical was required to create a step change.
It is probably worth looking at the IR35 situation from a historical point of view at this point to put the 20,000 public sector contractors into some perspective.
The introduction of IR35 (Intermediaries Legislation) back in April 2000 by the then Chancellor Gordon Brown, was targeted to counter the avoidance of employed levels of tax and National Insurance by individuals providing their services through a Limited Company or PSC (Personal Services Company) as they became known. The key point was that the onus for adherence was placed on the PSC and as such unintended consequences occurred which some would argue increased the perceived issue.
With the PSC being responsible, many organisations and recruiters took steps to ensure that they removed any liability to HMRC by insisting that all contingent workers were supplied through a PSC.
This removed many sole traders from the supply chain as they were seen as a potential tax liability should HMRC deem that they were in fact disguised employees.
At the same time, many workers who were using Umbrella companies were shown that operating through a PSC could be to their benefit in terms of reducing their tax liabilities; accounting solutions flourished and the move to PSC status was made as smooth and painless to these workers. So rather than reduce the number of PSC’s and increase tax take for HMRC the legislation made the problem bigger and at the same time offered protection from HMRC for those creating the jobs.
So, the starting point for HMRC, without acknowledging the reasons above, was to try to move this liability for proven cases of unpaid taxes. The blame for the situation was placed firmly on those operating non-compliant PSC’s and it was positioned as levelling the field of work to remove the opportunity where “a worker can pay less tax than a colleague they work side by side with, simply because they work through a limited company”. They explained that nurses, social workers, teachers and many others were operating in business-as-usual roles as PSC’s which should be seen as disguised employment.
Interestingly, the initial discussions seemed to suggest that the Agencies and Workers were creating this situation with little acknowledgement that the hiring organisations are ultimately responsible for all roles that are created and the way in which they are filled ie. Employee, Worker or Self-employed. Over the period of the consultation this was finally recognised and the role of the hiring organisation was placed at the centre of all activities.
So, what does this mean, moving forward?
The new legislation impacts any “public authority” where a public authority as defined by the Freedom of Information Act 2000 or; a Scottish public authority as defined by the Freedom of Information (Scotland) Act 2002 (asp 13) or; Corporate Officer of the House of Commons or the House of Lords or; the National Assembly for Wales Commission or; the Northern Ireland Assembly Commission.
So, as an agency when we engage with any client we need to establish if they are within this definition of a “public authority”. If not, the existing rules of engagement apply. If they are, we need to clarify the position on offer.
IN or OUT:
The client (the hiring organisation) has the responsibility to determine the status of each position which it is looking to fill in its organisation on or before the time of entry into a contract for supply. In taking this decision they must take reasonable care in coming to its conclusion.
HMRC have developed and made available a web-based tool called the ESS (Employment Status Service) which will help in this process, though interestingly it is not prescribed.
So, as an agency we will be asking for the IN/OUT decision before we commence any work on any new opportunity from a public sector client.
Where the decision is IN, i.e., the Intermediaries Legislation applies, we will accept this decision without any further need for proof of how the decision was arrived at.
Where the decision is OUT, i.e., the Intermediaries Legislation does not apply, we will require the client to provide a copy of the output generated by the ESS tool which supports the decision. Whilst this is not mandated in the legislation, HMRC have said that they will stand by any decision generated by the ESS tool providing it has been completed fairly and honestly.
When advertising new roles for the public sector we will always make clear if the role is IN or OUT with regards to the Intermediaries Legislation.
When a role is IN we will include the following section in the advert:
**The client has stated that this role is “IN” the new off pay-role worker legislation – Maximum day rates: £500.00 Umbrella / £443.00 for PSC – Deemed PAYE**
Roles that are IN will generally offer 2 rates of pay, one for Umbrella contractors and one for PSC contractors.
The Umbrella rate will be higher as we the Agency are not responsible for paying the worker. In this case the Umbrella company is responsible for payment and also making the correct deductions for Employers NI, PAYE and employee NIC’s which it will then send to HMRC.
For PSC’s, as the Agency we are responsible for payment for works completed and we now need to be able to cover the Employers NI element which becomes payable at source. This is done in the same way as the Umbrella company by deducting it from the day rate, though in this case it will lower the headline day rate on offer.
When a role is OUT we will include the following section in the advert:
**The client has stated that this role is “OUT” of the new off-payroll worker legislation – Maximum day rate up to “600/Day Ltd**
The full rate on offer will be paid to a PSC workers Limited Company and they will retain the responsibility for paying any taxes which become payable based on the revenues generated.
Similarly, if an Umbrella worker were to engage on such an assignment we would pay the full rate to their Umbrella company, who in turn would continue to make the deductions for Employers NI, PAYE and employee NIC’s as they are an employee.
Because the client has full control over the way they apply the legislation some may issue rules that specify that they are only willing to accept workers who are supplied through an Umbrella company or as PAYE (Employee) of the agency. As such no PSC contractors will be considered for these assignments.
For Arras, that would mean that we would advertise these role as Umbrella ONLY as we do not offer PAYE (Employee) status to workers.
Invoicing and Payment:
For those engaged through the services of an Umbrella Company there will be no change. Invoices will be generated for days worked against the agreed day rate + VAT. The Umbrella Company will then be responsible for paying the worker after the appropriate deductions have been made.
For those engaged through a PSC, invoices will be generated for days worked against the contractually agreed day rate + VAT (if VAT registered). Settlement of the invoice will be different based on whether the assignment is IN or OUT.
Where the assignment is OUT of scope of the legislation, Arras will pay the full amount of any agreed invoice to the Limited Company on the terms agreed in the contract. NO DEDUCTIONS will be made.
Where the assignment is IN scope of the legislation, Arras will have to add the named worker who delivered the work for the Limited Company to our payroll as a deemed employee.
The invoiced amount (less VAT) will then be processed as gross through payroll with a Tax Code BR (until HMRC issue an updated code) and the necessary deductions made for PAYE and Employee NIC’s. The net amount will then be settled against the invoice as well as the full VAT amount to the Limited Company on the terms agreed in the contract.
As a deemed employee, the named worker will not have any employment rights and will not be an employee of Arras, this status is one purely created by the legislation to facilitate the collection and payment of employment taxes. At the end of any assignment or at the crossing of a tax year the deemed employee will be issued with P45/P60 documentation to show taxes deducted and paid which can then be used to resolve tax liabilities of the Limited Company and the named individual.
It will become part of the ongoing process that a review of the status (IN/OUT) of any assignment be undertaken should there be a material change to the method of supply or the duties that are undertaken.
This will also take place at any point where an extension is proposed to ensure that the decision still holds true against the working practices. Should any status change from IN to OUT it would be necessary to supply the ESS output to support the updated decision. If the decision were to go from OUT to IN a process of review/appeal would be expected.
Naturally at any point of change there is always some level of uproar and a highlighting of the negative impacts that will arise and this legislative change is no different.
There will no doubt be winners and losers, not only amongst those who offer their services as PSC contractors but also amongst those that provide a myriad of services to support such people. Umbrella solutions which have been on the decline, will no doubt see a bounce as some organisations mandate their use in order to simplify their own operations and as current PSC’s close their Limited companies.
There have been many polls and stories saying that the public sector will see mass resignations as PSC workers who are selected as IN resign to take up posts within the Private sector, leaving many posts unfilled and departments unable to deliver their services.
No doubt we will see some resignations as contractors with specific skill sets move on to new assignments, but for many the ability to earn something in the short-term will override their determination to earn nothing!
We will also see a reversal of the 2008/09 situation where Private Sector workers thought they could find shelter in the Public sector, only to be disappointed as their skill sets we deemed as not suitable.
For others, this will be a great opportunity where they can move onto a more senior role, acceptably at a reduced level of remuneration than pre-April 2017 but still at an increase to them. Sure, they may not be as experienced, but given the opportunity they can surely learn? And with time under their belt they will then make the market more competitive?
There will also be a rush to market of new “compliant, efficient and lucrative solution to the issue of IR35” which will be interesting to watch.
Our own experience so far is that the senior people we have placed in the Public sector have been found to be OUT of the legislation as the previous IR35 reviews had shown.
We have clients who have made across the board decisions that all contingent workers are IN and whilst this has created some consternation the level of those choosing to resign is very low.
In terms of new roles that we are advertising, there appears to be no shortage of candidates willing to take on new contracts be that through their PSC as a deemed worker or through an Umbrella.
Right at the beginning of this process one mandarin from HMRC stated that the Public Sector needed to address this situation and “put its own house in order” before they could realistically put this legislation into the Private sector.
With step one enacted, it is hard to believe that this will not be decreed as a fantastic success in the very near future (Autumn 2017 budget?) and at that point the UK market will be levelled once again as it is rolled out into the Private sector.
Rightly or wrongly there will no doubt be many more arguments but personally I can’t see how it is sustainable to have a market where say £500/day in the Private sector is worth 33% less in the Public sector as it becomes taxed at source!