The promised ‘Off-payroll working in the public sector: reform of the intermediaries legislation’ consultation document which reviews the IR35 legislation was published on 26 May 2016 and can be found here.
The foreword by David Gauke MP, Financial Secretary to the Treasury clearly highlights the evidence of widespread non-compliance with the IR35 legislation though states this document only focuses on off-payroll workers in the public sector with the reform aimed at improving effectiveness of the rules there.
It includes a list of all the organisations that are officially recognised as the public sector which of course includes the NHS. The impact of these proposed changes will be profound, ‘From April 2017, where workers are engaged through their own limited company, often known as a personal service company (PSC), responsibility to apply the intermediaries rules will fall to the public sector body, agency or other third party paying the worker’s company.
This means the public sector body, agency or other third party will be liable to pay any associated tax and National Insurance.’ Currently it is the responsibility of the PSC itself to apply the intermediaries’ rules and for NHS PSC workers, to provide evidence to the Trust that they are complying with the intermediaries legislation.
There will be an initial test to see if the rules apply, i.e., to remove those business to business relationships which fall outside of the scope of the rules. To know more, please head here.
It is evident that the NHS is under the scanner of HMRC for widespread tax avoidance and the Government is becoming more aggressive in its bid to claw in its tax revenue. The short duration of the consultation with the outcomes sure to be published in the Autumn Statement, seem to indicate fine tuning around the edges rather than any real interest in truly assessing the impact of the proposed changes.
PSC workers supplying the NHS are already under scrutiny and this proposal simply changes where the responsibility lies for enforcing the intermediaries legislation. The government’s highlighting the potential difficulty of accounting for tax by the engager and PSC if the 5% allowance for business expenses is retained makes us wonder if they are also considering its removal which would take away one of the few remaining benefits for operating as a PSC. Or are they considering the introduction of something different?
The payment of VAT is included within this proposal for PSCs which, like other businesses, must register for VAT if their turnover is more than £83,000. This comes at odds with the growth of the VAT mitigation NHS-supply model where many workers’ income will exceed this amount.
There will be an increased requirement for the involvement of accountants to ensure tax isn’t paid twice, VAT and Corporation Tax are accounted for and the 5% allowance correctly deducted.
The government is apparently aware of the requirement for public sector organisations and agencies to join up their separate payroll systems to enable them to comply with the proposed changes and the time this may take to undertake and we therefore advise agency payroll departments to start gearing up for this if they haven’t already.
The deemed payment route with evidence supplied is the correct way to continue for PSCs within IR35 rules for this financial year. We need to wait for further information as to how the government will reform the deemed payment formula calculation to ensure the PSCs are taxed at a correct amount after April 2017.
This article was originally published on 31 May, 2016 on LinkedIn Pulse.