Out-Law News 3 min. read

Proposals for moving UK public sector contractor tax compliance to end user published


Plans to make public sector bodies responsible for ensuring that third party contractors working for them are paying the right employment taxes have been published for consultation by HM Revenue and Customs (HMRC).

The proposals would shift responsibility for compliance with the intermediaries legislation, known as IR35, from the worker to the contracting public body, as announced by the government at the 2016 Budget. Where the worker is engaged by a public body through a third party such as an employment agency, outsourcing company or consultancy firm, that third party would be liable for ensuring compliance with the rules, according to the consultation.

The changes have been prompted by "evidence of widespread non-compliance" with the existing rules, HMRC said in its consultation. However, the rules will remain unchanged in the private sector for the time being, it said.

"[Non-compliance] is both unfair to those who pay the correct taxes on their income, and costs the Exchequer a significant amount of revenue each year," HMRC said in its consultation. "The government believes public sector bodies have a duty to ensure the people working for them are paying the right tax."

The consultation confirms that the shift in liability from the individual to the end user of their services is due to take place in April 2017. From this date, public sector employers and their agencies will be required to report the income tax and National Insurance contributions (NICs) of these individuals through their existing Real Time Information system, according to the consultation.

First introduced in 2000, IR35 is intended to stop contractors from using a  personal service company (PSC) in order to avoid paying tax and NICs. A PSC is typically a limited company through which a worker is contracted to supply services, but of which the contractor is the owner and sole director. Where IR35 applies, the contractor must pay broadly the same tax and NICs as an employee would.

Public sector bodies already have to meet additional compliance requirements when engaging off-payroll workers, according to the consultation. They must seek contractual assurances that any workers engaged for longer than six months and paid more than £220 a day are paying the  correct amount of tax and NICs, and to supply the names of those from which no such assurance is forthcoming to HMRC. They are also required to pay board-level officials and those with "significant financial responsibility" through payroll, unless short-term "exceptional circumstances" apply.

The change will apply to individuals engaging with the public sector through a PSC where the individual is "doing a similar job in a similar manner to an employee". HMRC will provide a new interactive online tool to assist public sector engagers seeking to determine whether or not the rules apply to a particular engagement. This tool will be publicly available, allowing private sector firms contracting with PSCs to check whether the arrangement falls outside the IR35 rules. However, responsibility for compliance in the private sector will remain with the individual.

As part of this tool, HMRC intends to simplify the existing 'employment status' test "so it is easier and more straightforward for an engager to decide if an engagement is in or out of the scope of the rules", according to the consultation. Where the relationship is not purely a business-to-business relationship, the engager will need to consider whether the arrangement requires personal service from the contractor and whether it has the right to decide how the work should be done. If the answer to both these questions is 'yes', then the individual is within the scope of the rules, according to the consultation.

Where the PSC is engaged to work in the public sector through a third party, it will be that third party which will be responsible for determining whether an engagement falls within the new rules and for paying the associated tax, according to the consultation. The government has chosen to adopt a broad definition of what counts as a third party, because otherwise it would be "relatively simple to avoid the effect of this change by restructuring contracts to be about service provision rather than a supply of a worker", according to HMRC.

However, the new rules will not apply where the worker engaged through a third party is on the payroll of that third party - for example, a consultant who is employed by a consultancy firm or an auditor supplied by and employed by an accountancy firm, according to the consultation.

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