To address some of the issues outlined above and just as importantly to defuse the private sector, HMRC introduced the updated Off-Payroll Workers (IR35) legislation for the Public sector on the 6th April 2017.
The legislation was updated by HMRC to address public sector contractors (Limited company PSC’s) who they felt were “not paying the right tax” under the existing IR35 legislation. Also, HMRC felt that many of these positions were,...
in fact, being undertaken by disguised full-time employees rather than bona fide contractors.
The 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.
The most significant change was to pass the responsibility for setting the IR35 status from the worker (PSC) to the hiring organisation (Client) and moving the liability for any unpaid taxes (plus any interest and fines) to the fee payer (Hirer or Agency).
In taking the IR35 status decision, the organisation must take reasonable care in coming to its conclusion and failure to do so or failure to provide such determination could see any liability move from the fee payer back to the hiring organisation.
HMRC developed and have made available a web-based tool called CEST (Check Employment Status for Tax) which they say will help hiring organisations determine IR35 status, though interestingly it is not prescribed. HMRC do however state that where CEST is used “correctly” they will stand by the decision provided.
So, from April 2017, all roles that are filled by non-payroll workers have been identified by the hiring organisations as IN or OUT of scope with regards to IR35.
Where the decision is IN, i.e., the Intermediaries Legislation applies, and PAYE/Employers NI become payable by the fee payer on any sums paid. The worker is treated as an employee for taxation purposes but gets no employee rights under employment legislation.
Where the decision is OUT, i.e., the Intermediaries Legislation does not apply and the non-payroll worker can continue to operate their Limited company PSC outside of the IR35 net.
The fall out:
Naturally, this change met with large scale opposition from many workers, accountants, lawyers who saw it as a threat to their wealth and wellbeing. At the same time, agencies had new liabilities to contend with and hiring organisations saw a significant amount of additional effort for no real gain.
Within a short period, HMRC was calling the implementation a massive success with increases in permanent employee numbers and increased PAYE and NI contributions.
In reality, the following was seen:
- The departure from the public sector to the private sector for those workers with transferable skills, leaving some public sector bodies unable to staff their ongoing and new projects.
- Increased days rates for essential workers captured as IN-Scope to cover any shortfall in their earnings.
- Increased use of consultants to deliver work at a higher cost than previously used contingent resource.
- Blanket decisions in departments such as the MoD which captured all contingent workers as In-Scope with no right to appeal.
- High closure rates of PSC’s as they were forced to switch to using Umbrella companies who became the fee payer deducing all relevant taxes.
- Significant increase in the use of Umbrella schemes that reduced the impact of the new levels of taxation on workers earnings due to IN-Scope determination. This occurring despite the HMRC’s 2019 loan charge legislation which is looking to address historical abuse of payment through loans.
- Workers reporting significant fall in take-home pay after paying payroll taxes and also funding the employers NIC elements from their day rates.
- Unknown levels of workers being taxed as employees due to incorrect IN-Scope determinations.
- The accuracy/usefulness of CEST has been an ongoing issue between the accountants/lawyers and the HMRC regarding its recognition or otherwise of case law built up around IR35.
The creation of two markets (Public/Private) and the different modes of operation were always going to be an issue in that the real impacts of the change could not be seen and some workers would have an escape route to the private sector. From the Government/HMRC’s point of view, it was seen to be a necessary stepping stone so that the private sector could not point fingers and demand that they get their own house in order before implementing such dramatic changes.
Made a change, it certainly has, though it would appear that there are many further steps to be taken before it will be seen as fair to all.
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- UK – Public Sector Off-payroll working rules (Feb 2017)
- UK – Disguised remuneration charge on loans (Feb2019)
- Report – 2018 Project Management Benchmark Report (Feb 2019)
- Report – 2018 Project Management Snapshot Report (Nov 2018)
- Report – 2018 Project Management Benchmark Report (Feb 2018)
- Report – IR35 and its Impact in the Project Management Domain (Nov 2017)