Off Payroll Worker
The government seem adamant that a Contractor and an Employee are one and the same thing. With the introduction of enhanced IR35 legislation targeting ‘Off Payroll Workers’ in the public sector, they are looking to increase the tax burden for contractors and those that engage them.
The issue here is what support will the government provide to the Contractor when they are out of contract for any length of time?
Under these new rules Contractors will have the same tax liabilities as an employee, with none of the associated benefits like sick pay, holiday pay and redundancy! This will not allow them to build any reserves in their company so when a lean period does arise, they will be unable to trade through it and support the company and its costs.
For the engagers, this is just as bad, they will find it very difficult indeed to secure temporary labour at current rates, for projects that are inherently temporary in nature they may need to hire permanent staff.
Employment, tax and recruitment costs will increase at a time when margins and government spending is stretched to breaking point.
This is a case of the government simply not listening. They are set on comparing apples to oranges, and unless the fog lifts soon, it could lead to dramatic changes in the flexible workforce landscape.
Contact us today to discuss how these changes will impact you, It is essential you are aware of these changes and have an exit strategy planned.
Below are two examples of how the new rules will work from 1st April, one for a PSC dealing direct with a public body, one for a PSC billing via an agent into a public body:
EXAMPLE 1:
Rebecca is an Information Technology (IT) Contractor engaged by a central government department, the Ministry – off-payroll working rules apply.
Context
Rebecca works through her own PSC, Rebecca IT Ltd and is interested in a six month engagement as an IT product designer at the Ministry where she has worked in the past.
Rebecca IT Ltd has a draft contract from the Ministry to provide Rebecca’s services. Rebecca is keen to understand the role, the objectives and expectations of the post. She also wants to know how the job will affect her tax and NICs, and those of her PSC.
Do off-payroll rules apply?
The Ministry’s Human Resources (HR) department has experience of confirming the employment status of all of their off-payroll workers following the issue of Procurement Policy Note 08/15 – Tax Arrangements of Public Appointees, on 27 March 2015.
The Ministry has advised that they consider the post to be subject to the changes to the off-payroll working rules. Rebecca has read about these changes so she asks her accountant to find out how they will affect her. He uses the off-payroll service available on GOV.UK to understand the implications.
From the draft contract, the accountant notes that:
· Rebecca will be working in at the Ministry’s IT development centre
· she is not required to supply her own equipment
· Rebecca will work under the direction of a senior manager
· flexible working hours are available but Rebecca will need to agree time off with her manager
Using the Employment Status Service
Rebecca’s accountant uses the online Employment Status Service to help him understand the situation. Rebecca owns more than 5% of her PSC and is the sole director and employee.
The Employment Status Service asks for responses to a variety of questions to determine whether off-payroll working rules should apply. For Rebecca, the service indicates that the rules should be applied.
The contract will be subject to the new rules for working off-payroll in the public sector. Rebecca is happy that her own, and her PSC’s tax affairs will be compliant with the rules. Rebecca IT Ltd accepts the contract and Rebecca starts work.
Deducting tax and NICs
She provides the HR manager at the Ministry with the information they need to provide to HMRC, via RTI the tax and NIC deducted from the payments made to Rebecca IT Ltd, as if Rebecca was an employee.
This includes:
· Rebecca’s National Insurance Number
· her date of birth and personal address
· a P45 from Rebecca’s previous employments in the tax year if available
· the bank account details in to which payments will be made
Rebecca does not need to provide any Student Loan information as she declares that through her self-assessment tax return.
Paying the PSC
As the fee-payer, the Ministry’s Finance and Payroll departments update their systems to enable PAYE and NICs to be deducted from payments to the PSC, Rebecca IT Ltd. Rebecca will not be enrolled in to the Ministry’s pension scheme, or pay-rolled benefits arrangements.
More detailed guidance regarding tax codes and the information that fee-payers need to supply in Full Payment Submissions (FPS) will be issued shortly, after draft legislation is published.
Responsibility for secondary NICs
The Ministry will pay secondary NICs related to the engagement, as it does for directly employed people.
Payments and deductions made by the Ministry (all figures are illustrative)
Each month, Rebecca IT Ltd invoices the Ministry £7200 which includes £1200 VAT.
The Ministry treats £6000 as Rebecca’s earnings and deducts £1400 tax and £400 employee NICs which it pays to HMRC via RTI with £700 employer NICs.
Each month, the Ministry pays Rebecca IT Ltd a total of £5400, which is £4200 for the services provided plus £1200 VAT.
Statutory payments
As Rebecca will not be an employee of the Ministry she will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Maternity Pay through their payroll.
As is the case now, Rebecca will continue to be able to claim statutory payments through her PSC.
Payments received by Rebecca IT Ltd
Rebecca draws £3000 in salary each month through Rebecca IT Ltd’s payroll. Tax and NICs are not deducted as these have already been deducted at source by the Ministry. This means that Rebecca will continue to be able to claim statutory payments, as she can now.
From the contract with the Ministry, Rebecca IT Ltd receives:
· £25200 in payment from the Ministry, net of tax and NICs
· £7200 VAT charged for services provided
The contract ends
When the contract comes to an end, the Ministry gives Rebecca a P45 as they would for a directly employed person who leaves their employment. The P45 indicates Rebecca has paid £8400 tax and £2400 NICs.
Rebecca moves on to other contracts in the private sector for which she receives £20000 for five months’ work. Rebecca IT Ltd determines that the intermediaries legislation should be applied and pays Rebecca a salary of £3000 and deducts tax and NICs and pays them to HMRC, with employer NICs.
At the end of the year
At the end of the financial year, because Rebecca has paid Income Tax on income going into the PSC, her accountant disregards this engagement when calculating the deemed employment payment due for Rebecca IT Ltd. This ensures Rebecca will not pay tax and NICs twice on the same income.
Rebecca’s accountant includes the income from the engagement with the Ministry, with the other deemed employment payments received in the employment income section in her self-assessment tax return.
The VAT and corporation tax liabilities of Rebecca’s PSC remain unchanged by the proposed reforms.
EXAMPLE 2:
Workers 4 U Ltd is an employment agency, supplying nurses to an NHS Trust – off-payroll working rules apply
Context
An employment agency, Workers 4 U Ltd specialises in supplying medical staff to the NHS. An NHS Trust has contracted the agency to supply them a mental health nurse for a year to cover a period of maternity leave. The contact is worth £36000 plus VAT.
Mikael is a mental health nurse who provides his services through a PSC, Mikael Health Ltd. He gets much of his work through Workers 4 U Ltd.
Do the off-payroll rules apply?
The NHS Trust’s HR department has experience of confirming the employment status of off-payroll workers following the issue of Procurement Policy Note – Tax Arrangements of Public Appointees, 08/15 on 27 March 2015. That however does not apply to agency staff.
The agency knows there have been changes to off-payroll working in the public sector. As they will be paying Mikael’s PSC, Workers 4 U Ltd asks the NHS Trust to determine whether off-payroll rules need to be applied.
The NHS Trust have advised the agency that the worker they supply will be expected to:
· be part of a team working to a Head Nurse
· work a fixed shift pattern in one of their local units
· the shift pattern and location could change at short notice where necessary
· all equipment required to undertake the role will be provided
· parking is also provided at no cost to the worker
Using the Employment Status Service
The NHS Trust uses the online Employment Status Service which determines that the engagement would be subject to the new rules for working off-payroll in the public sector if a worker was provided though a PSC. It advises Workers 4 U Ltd accordingly.
Deducting tax and NICs
Mikael agrees to take the job. The agency tells Mikael that the invoice his PSC sends them will be paid net of tax and employees’ NICs. Workers 4 U Ltd’s finance department obtain from Mikael the information needed to pay his PSC having deducted and paid over to HMRC the tax and NICs due each month.
This includes:
· his National Insurance number
· date of birth
· personal address
· P45 from previous employments if available
· the bank account details in to which payments will be made
Workers 4 U Ltd will not need any Student Loan information from Mikael as he declares that through his self-assessment tax return.
Paying the PSC
As the fee-payer, Workers 4 U Ltd’s accounts department update their systems to enable PAYE and NICs to be deducted from payments to Mikael Health Ltd. When doing so, the payroll team marks the record to indicate that the employment will not be subject to pension enrolment or pay-rolled benefits arrangements.
More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after draft legislation is published.
Responsibility for secondary NICs
The agency will pay secondary NICs related to the engagement, as it does for directly employed people.
Statutory Payments from Workers 4 U Ltd
As Mikael will not be an employee of Workers 4 U Ltd he will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Paternity Pay through their payroll. As is the case now, Mikael will continue to be able to claim statutory payments through his PSC.
Payments and deductions made by Workers 4 U Ltd (all figures are illustrative)
Each month, the agency invoices the NHS Trust a figure of £3600 for the cost of the labour provided. This includes £600 VAT.
Mikael, through his PSC sends the agency an invoice for £2200 per month as the agreed charge for his services. Mikael Health Ltd is not registered for VAT as the company’s turnover is below the VAT minimum threshold.
The agency treats the full amount of the invoice, £2200 as Mikael’s earnings and deducts £250 tax and £200 employee NICs which it pays to HMRC via RTI with £200 employer NICs.
The agency pays Mikael Health Ltd a total of £1750.
End of contract
From the £36000 invoiced to the NHS Trust, the agency pays out:
· £21000 in payments to the PSC
· £3000 Income Tax, £2400 employee and £2400 employer NICs to HMRC
Workers 4 U Ltd earns £7200 from this engagement before its own costs are taken into account. They give Mikael a P45 as they would for a directly employed person who leaves their employment.
