The Off Payroll Legislation Change – Coming 6th April 2017
Following a consultation and announcement in the chancellors autumn statement, it has been confirmed that from the 6th April 2017, anyone working ‘off payroll’ in the public sector who is deemed as‘inside of IR35 legislation’ must pay the right amount of tax and national insurance, and that the entity that is responsible for such deductions is the one that pays the candidate. In most cases, this will be the recruitment agency, i.e. Charles Hunter Associates.
What does this all actually mean?
Off payroll describes all workers that are not paid through PAYE - Pay As You Earn. Put simply, this is if you work through your own Personal Service Company (PSC) or Limited Company.
IR35 legislation explained
The IR35 legislation has been in force since April 2000. It was implemented by the government to prevent off payroll workers who they saw as being ‘disguised employees’ from benefiting from paying significantly less tax than those who are employed permanently by an end client. The term ‘disguised employees’ refers to those workers who are under the supervision, direction and control of the end client, therefore seemingly being under the employment of the end client. If you are seen to be under the supervision, direction and control when working in an assignment, you are deemed to be ‘inside of IR35 legislation’ and are required to pay the right tax and national insurance contributions at source.
So, what has changed?
Currently, and pre-April 2017, it is the PSC company that is liable for the payment of all tax owed. An example of this would be that a PSC company is operating as if they are outside of IR35 legislation and therefore it pays its director (the worker) national minimum wage as a base salary and the rest of the earnings are through dividend payments at reduced tax. This way, the worker benefits from a lower tax bill and more bang for their buck. However, if HMRC decide that you fall inside of IR35 legislation, they are within their rights to request a backdated tax payment which could be an awful lot of money and comes out of your pocket as the contractor.
HMRC estimates that 90% of Personal Service Companies (PSC) are not paying the right tax and national insurance payments because of falling ‘inside of IR35’. However, because there are an estimated 200,000 or more PSC companies in the UK, they simply cannot control that number of potential investigations to determine whether the PSC company owes unpaid tax. Therefore, from April 2017 it now falls on the recruitment agency who pays the off payroll worker to account for the correct tax and national insurance should they fall inside of IR35 legislation. HMRC believe this will ensure that they will prevent off payroll workers inside of IR35 from paying less tax than is owed.
What exactly will happen?
The new rules that determine whether a worker falls inside or outside of IR35 are purely based on whether the worker -
Provides a personal service: Are they required to do the work themselves?
Control: Does the end client decide, or have the right to decide, how the work should be done?
It is our belief at Charles Hunter Associates that all social workers fall inside of IR35 legislation and as such must account for the correct tax and national insurance.
Therefore, it is not viable that a social worker can carry on working through their own PSC company given that the agency would need to deduct the workers tax and national insurance before paying an invoice, removing any associated benefits of running a PSC company whatsoever.
What are the alternatives?
Your alternatives are to either sign up with a reputable and compliant umbrella company that deducts PAYE, or chose to become PAYE directly through your agency.
One thing to consider as a contractor is that if you decide to go umbrella, your hourly rate will remain the same and the umbrella company will deduct the correct taxes prior to your payment. However, if you go PAYE through the agency, your hourly rate will reduce. This is to account for the fact that umbrella and PSC pay rates automatically include statutory deductions (employers NI and holiday pay), and going PAYE will mean these statutory deductions are removed from your hourly rate. This is because the recruitment agency accounts for this directly with HMRC.
Other things to consider
We do need to wait for further information to be released from both the Local Authorities we recruit to and the Managed Service Providers (MSPs) who run those contracts (Adecco, Comensura, Matrix etc).
There is a chance that the Local Authorities and MSPs will have a viewpoint on how they want contractors to work and we must wait for this response. We expect that over the coming weeks, more information will be released and we can let you know what impact this may have.
There is a considerable chance that Local Authorities and MSPs will take the decision to no longer accept workers through a PSC / LTD company and only accept those on assignment through an umbrella company or PAYE only. This is speculation, but we do expect some policy to be introduced around this.
In the coming weeks, Charles Hunter Associates will be liaising with Local Authorities and MSPs to determine what course of action they want PSC workers to take. We will also be providing a list of compliant umbrella companies for consideration which we will distribute in March.
I am sure that this communication will evoke a lot of questions and need for clarification and we are here to support you and help with this. On that basis, Charles Hunter Associates will be hosting a webinar on Wednesday 8th February between 7pm and 8pm to discuss this in more detail and answer your questions on the night.
What is most important is that assignments are not disrupted, and information is clear and we will be doing all we can to support our workers during this period of change.
Jonathan Wadsworth, Managing Director