With effect from April 2017, changes to the rules around off-payroll workers in the public sector will impose significant additional burdens on schools and Academies which employ staff via intermediaries.
The supply of straightforward agency workers from an employment business will not be affected. But any other relationships where the school/Trust does not contract directly with the individual providing the services may be.
To understand the changes, it is necessary to consider the history of off-payroll working. Off-payroll working is by no means a recent phenomenon. Historically, the model typically looked something like this:
- A body (“the employer”) wanted to engage the services of an individual (“the contractor”)
- The employer would enter into a contract with an intermediary (generally a limited company owned by the individual), under which the intermediary would agree to supply the individual to the employer.
- The intermediary would (usually) enter into a separate contract with the contractor, to provide the services.
- The employer would pay the intermediary for the services which were provided. The intermediary would pay the contractor a relatively low wage, but return significant dividends to its sole shareholder – the contractor.
Because of the differing tax treatment of dividends versus employment income, this was a tax-efficient way for the employer and the contractor to structure their relationship. In response to this, in 2000 a piece of legislation popularly known as “IR35” was introduced.
In essence, IR35 allows HMRC to look through an intermediary relationship. It applies in cases where the relationship between the employer and the contractor is such that, if they contracted directly with each other, the contractor would be regarded for tax purposes as an employee of the employer.
It is up to the intermediary to determine whether IR35 applies. Where it does apply, the intermediary has to deduct income tax and national insurance contributions via PAYE from the sums it would pay to the contractor.
This still leaves the employer in a fairly strong position. Provided the contract with the intermediary is sound, the risk of IR35 being held to apply generally rests with the intermediary. However from 6 April, an amendment to IR35 will change that – at least as far as public sector employers are concerned. For the purposes of the new Regulations, “public sector” will have the same meaning as in the Freedom of Information Act – so Academies and maintained schools will be caught.
From 6 April, the responsibility for assessing whether IR35 applies will rest with the public sector employer. This will be the case even where the public sector employer has no direct contract with the intermediary, but instead contracts with it via an Employment Business. Importantly, the change applies to all payments made after that 6 April, regardless of when the contract was entered into – so it will apply to existing as well as new arrangements.
HMRC have indicated that they will be introducing a new Employment Status Service, which will replace the Employment Status Indicator. Public sector bodies will be able to answer a series of questions, following which the Employment Status Service will give an outcome regarding the contractor’s status. However it isn’t yet in place.
If IR35 does apply, it will then generally be the responsibility of the public sector employer to deduct the appropriate income tax and national insurance from all payments it makes to the intermediary. However if the arrangement is via another body, for example an Employment Business, it will be the responsibility of the Employment Business to deduct the tax and national insurance from the payments it makes to the intermediary.
Where the public sector employer is required to make deductions for income tax and national insurance, it will also have to make secondary (employer’s) national insurance contributions. Therefore the overall cost of the arrangement will be more than it would have been before the changes take effect. Employers may need to review the rates that they pay under such arrangements to take account of this.
If you would like advice on any relationships which may be caught by the rules, the School Support Service would be happy to help – this is a complex area and it is important to get it right.
SSS Helpline: 0345 070 7437