Updated: This guide was updated to clarify how off-payroll working in the public sector rules apply to businesses that provide ophthalmic and pharmaceutical services.
Intermediaries legislation changes
From 6 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.
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
When the changes take effect
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 still apply.
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 (employee) National Insurance contributions (NICs) and pay them over to HMRC. These amounts will be deducted from the intermediary’s fee for the work provided.
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 payment received from the fee-payer which has already had Income Tax and NICs deducted.
The key responsibilities are split as follows.
A worker working through a Personal Service Company (PSC) or other intermediary is responsible for:
- providing the fee-payer (public sector client, agency, or other third party) with the information they need to help determine whether the off-payroll working in the public sector rules should apply
- where the off-payroll working in the public sector 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
A public authority, agency or third party acting as the fee-payer is responsible for:
- 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
A public authority is responsible for:
- determining whether off-payroll working in the public sector rules should apply initially and when there are contractual changes, as the party engaging the worker for a specific task or role
- where they are using an agency or other third party to provide labour, notifying them whether off-payroll working in the public sector rules should apply to the contract they have with the worker
- for contracts starting after 6 April 2017, notifying their decision before entering into the contract or before the provision of services begins – if it fails to do so, it becomes responsible for accounting for PAYE as if it were a fee-payer
- for contracts in place before 6 April 2017, their decision should be notified before the first payment after 6 April 2017 – if it fails to do so, the public authority becomes responsible for accounting for PAYE as if it were a fee-payer
- replying within 31 days to a written request from an agency or other third party as to whether off-payroll working in the public sector rules apply and setting out the reasons why – if it fails to do so, it becomes responsible for accounting for PAYE as if it were a fee-payer
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. It also applies to the UK Parliament, and the National Assembly for Wales Commission and Northern Ireland Assembly Commission.
Detailed guidance has been published that helps public authorities understand how these reforms will change the way they pay for workers affected by these changes. Depending on the size and type of public sector organisation there might be a number of people who are involved with the implementation of, or who need to know about the impacts of the changes.
Businesses that provide ophthalmic and pharmaceutical services
Retail businesses providing ophthalmic and pharmaceutical services for the NHS will not need to consider whether to apply the off-payroll working in the public sector rules to contractors working for them through an intermediary.
The definition of public authority retains the need for NHS hospitals to consider whether to apply the off-payroll working in the public sector rules to all contractors working for them through an intermediary. This includes contractors who are providing ophthalmic and pharmaceutical services through an intermediary.
The definition of public authority includes General Practitioner (GP) surgeries and dental practices or surgeries providing NHS medical and dental services. These entities are required to consider whether the off-payroll working in the public sector rules should be applied to contractors working for them through an intermediary.
The following list is not a definitive guide but should help public sector organisations to know, who might need further information. Public sector organisations might combine some of the duties outlined below into fewer teams.
Hiring teams: will need to know whether the post they are looking to fill is likely to be subject to these reforms. People applying, through their own intermediaries will need to know the tax implications in advance.
Where hiring teams use an employment agency, or other third-party to supply labour they will need to tell them if the rules apply for the positions they are filling.
Procurement teams: where the rules apply, procurement teams may want, or need to change existing contracts and draft future contracts to reflect changes in how invoices from such intermediaries will be paid.
Payroll teams: where the reforms apply, tax and national insurance will be deducted from fees, and reported and paid over to HMRC in real time. Depending on the organisation’s payroll and accounts arrangements, some internal changes to processes may be required to make that happen.
Employer’s national insurance will also be payable by your organisation.
Accounts payable teams: invoices received from intermediaries affected by these changes will need to be paid net of tax and national insurance. Depending on your organisation’s payroll and accounts arrangements, accounts payable teams may need to make some internal changes to processes to make that happen.
VAT may also be payable on the gross amount of the invoice.
Finance teams: these reforms will change the costs involved in engaging workers through intermediaries.
Chief accounting officers: HM Treasury rules on procurement will remain in place as will the responsibilities they include.
What can be done to implement the change
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 in the public sector rules apply when engaging a worker through a PSC.
Further guidance setting out whether contracts are in scope or out of scope, covering managed service companies and contracted out services is available.
Check employment status for tax service
Interested parties can use the check employment status for tax service to obtain the HMRC view of whether any current and prospective workers would fall within the off-payroll working in the public sector 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 in the public sector rules should apply.
Use of the service is optional.
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 in the public sector 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.
Legislation, guidance and technical information:
- Income Tax – Clause 7 and Schedule 1 of Finance (No. 2) Bill 2017
- NICs regulations were made and laid before Parliament and came into force on 6 April 2017
- 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
- guidance for agents published on 1 March 2017