An Organisation for all
Accountants in Practice

Status Tool Ready by End of Month

by Contractor Weekly

logo for contractor weekly

HMRC publish guidance on off-payroll working in the public sector
Late last week, HMRC published its guidance on the impending public sector off-payroll rules albeit somewhat limited and lacking any real meaningful detail. The guidance is contained within four documents.

PSC or other intermediary

 

Fee-payer

Public Authority

Provide fee-payer with information they need to help determine if off-payroll rules apply

 

Operating employment taxes associated with the contract

Decide whether off-payroll rules should apply initially and when there any contractual changes

Where rules apply, provide fee-payer with information required to allow them to deduct tax and NIC

 

Paying the deemed payment direct payment to the PSC

Notifying agency or other third party, where applicable, whether off-payroll rules apply

Reporting to HMRC on own and company’s tax affairs

 

Reporting the employment taxes deducted through RTI

Where it does not reply to the written request from an agency/other third party as to whether off-payroll rules apply within 31 days, become responsible for accounting for PAYE as if it were the fee-payer

 

Paying employers’ NIC

Pre-6th April 2017 preparations

Public authorities, agencies and third parties supplying contractors should consider existing contracts and prepare for the change. Will this stir up a hornet’s nest whereby an engager may decide that an existing contract, previously considered to be outside of IR35 by virtue of the existing assurance process, should in fact be caught by IR35?

Employment Status Service (ESS) tool

Interested parties can use the online tool to obtain the HMRC view of whether any current and prospective workers would fall within the new rules. The user answers a number of questions around the relationship between the worker and the public sector client, from which an answer on their status is provided.

The service is optional and is expected to be made available by the end of this month.

Excessive tax deductions

If a contractor thinks they have been taxed incorrectly, they can submit a repayment claim to HMRC. If HMRC agree, then they will issue a repayment of tax and/or NIC.

Personal service companies

Changes

From 6th April 2017, where the new rules apply, the client, agency or other third party that pays the contractor, known as the fee-payer, will deduct income tax and employee’s NIC from the contractor’s fee. These deductions will be paid directly to HMRC and will reflect on a freelancers’ tax records and contribute to their state benefit entitlement.

Deciding if the rules apply

This will be informed and influenced by a variety of factors based on the nature of the contract and the services provided by the contractor to the public sector client.

The ESS tool can help the public sector body make their decision and will be for use where a contractor obtains the work via an employment agency or other third party. Only in those circumstances?

Payments received from the fee-payer

HMRC have provided an example of the process of paying the contractor where the off-payroll rules apply.

PSC invoices fee-payer £6,000 + £1,200 VAT = £7,200

Fee-payer deducts £1,871 (£1,458 tax & £413 employee’s NIC) which it pays to HMRC

PSC receives £4,129 (£6,000 less £1,871) + £1,200 VAT = £5,329

Fee-payer also pays employer’s NIC on the deemed direct payment

The PSC will be allowed a corporation tax deduction up to the full amount of the deemed direct payment to prevent double taxation. This will be equal to the net fee. So, in the above example this would be £4,129.

Should the director decide to extract the full £4,129 as salary, then no further deduction of tax or NIC by the PSC is necessary, otherwise this will have been taxed twice. This will however have to be reported to HMRC as non-taxable payments on the Full Payment Submission (FPS) of RTI reporting.

Alternatively, a tax-free dividend up to the total of the net fee received can be paid and which does not have to be reported on the director’s self-assessment tax return.

Public authorities: using a personal service company

This informs of the steps for public authorities to consider when engaging with a PSC and where the PSC is paid direct their payroll department must note that the contractor will not be:

  • entitled to statutory payments
  • subject to student loan deductions
  • enrolled in to the authority’s pension scheme

Once the contract is ended a P45 must be given to the contractor.

If the ESS indicates that the rules don’t apply, then the public sector body must retain the records that support this decision.

Reform for fee-payers

The payroll processes for fee-payers are set out in this part of the guidance.

HMRC advises that there is no need for fee-payers to add PSC workers to their existing payroll but can be done on a discretionary basis.

The payroll requirements will largely be the same as the information reported for existing employees.

Starter information

When a contractor starts work, or when circumstances change that result in the off-payroll rules being applied, the fee-payer will be required to send a starter declaration (work out a new employee’s tax code) to HMRC. They are instructed to use Starter declaration C for workers engaged via their PSCs as the PSC is the contractor’s primary employment, so the services provided by them are treated as a secondary employment. This will mean that a tax code of BR will be operated and therefore basic rate tax deducted.

There is no requirement for a contractor to provide the fee-payer with a P45 from a previous employment.