IR35 obligations where personal services are provided to Public Authority clients

Posted by David on February 28, 2017
HMRC, News articles, Payroll, Status

There will be new ‘IR35’ rules to consider from 6 April 2017, where individuals provide their personal services to a Public Authority client via their own Personal Service Company (PSC). The planned changes apply for all payments made on or after 6 April 2017, whether or not the service etc was provided before that date.

The new obligations may be summarised as follows:

–           Firstly it is essential to decide whether the contract falls within the new rules, i.e. is the contractor supplying their services to a Public Authority client, as opposed to someone else (not always easy to tell, especially if there is a chain of contracts), and are they providing a personal service in doing so? NB: the stated definition of a Public Authority body is one which is required to respond to ‘Freedom of Information’ requests, but many smaller or subsidiary bodies are not actually sure if this applies to them.

–           If so, then the Public Authority client must make a decision whether or not ‘IR35’ applies i.e. would the worker be their own employee if none of the other ‘intermediary’ structures existed in the engagement chain?

–           If IR35 applies, the Public Authority must either withhold PAYE/NIC in full (accounting for this under RTI) or inform anyone else paying the PSC, in order that the payer may itself observe that obligation (the latter may apply if payments are routed through an employment business or agency to the PSC).

In making decisions on IR35 matters, HMRC expects the Public Authority to be able to rely on its new online digital status tool (which seems highly optimistic given that the tool was only made public by HMRC on 2 March, and there have been many signs in the ‘beta testing’ phase that the tool lacks robustness ). Whilst this digital HMRC tool may ultimately prove to be a useful guide, the distinction between employed and self-employed status remains a non-statutory test, so an effective working knowledge of employment case law is likely to be required.

This in itself assumes that the Public Authority will know enough about how the contract operates in order to make these decisions. Whilst HMRC insists that the IR35 rules are not being tightened fundamentally, all those in the contractual chain will need to have an operational understanding on these new procedures, as well as effective exchanges of information, to avoid PAYE/NIC simply having to be operated ‘by default’. This would inevitably cause upward pressures on the costs of the contract, if only for the fact that employer’s NIC would be due from the payer.

The most recent HMRC guidance also says that if the worker does not provide their services via a PSC, then the new rules don’t apply. Perhaps misleadingly, this guidance omits to say that more onerous obligations apply if the payer is a non-compliant Managed Service Company (MSC). In practice it may be very difficult to distinguish between a PSC, a compliant ‘umbrella’ payroll, and a non-compliant MSC, so specialist advice may be needed in cases of doubt.

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