Budget 2016: Clampdown on off payroll working in the public sector
George Osbourne yesterday announced an intended clampdown on the engagement of personal service companies by the public sector. The new measures will be out to consultation but if introduced they will represent some big changes to way in which the market operates. On page 98 of the full 168 page budget document, point 2.40 states: “From April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. The government will consult on a clearer and simpler set of tests and online tools. (Finance Bill 2017) (40)”
Like many others I was initially confused by this. How exactly will public sector organisations become responsible for operating the tax rules of companies they engage? Interims operating through personal service companies calculate their own tax and pay it directly to HMRC in arrears. Was the government proposing the removal of the PSC, so that a PSC’s revenue would be treated as an individual’s income, with tax deducted at source? And how would this marry up to IR35 legislation?
The devil turns out to be in the detail, and there is a technical note on the .gov website which explains how it might all work. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/507978/M1007_Tech_Doc_FINAL_V3_0.pdf One of the opening lines makes their stance clear: “Public sector bodies have a responsibility to taxpayers to ensure that the people working for them are paying the right tax.” HMRC recognises one of the key issues is that interims self-determine whether they are in scope or out of scope of IR35, and given the significant tax benefits of being out of scope, most interims position themselves accordingly. Under the proposed changes the engaging organisation, be that the end client, or the agency, will determine whether the PSC needs to comply with the rules and pay full income tax and NI.
The technical note goes on to say: “In partnership with stakeholders, HMRC will introduce clear, objective tests for employers to use to decide at the point of hire whether or not they need to even consider the new rules and then to quickly and decisively identify those engagements that are clearly caught by the rules.”
Sound familiar? In 2012 HMRC brought out a “business entity test” designed to be a self-assessment tool for interims to evaluate their risk of facing a IR35 HMRC investigation. The business entity test worked on a points scored basis, higher scores were low risk, and low scores were high risk. Example questions included whether the PSC had a different business address to the interim’s home address and how many clients the PSC had done business with in any given year. The business entity test was infrequently used and ultimately abandoned in 2015, but I suspect we’ll see it reincarnated, and the new “clear objective tests to be used by employers and agencies” will look similar. The test will need to clearly determine the difference between an interim and a consultancy business, and I suspect many interims will try and move more towards a consultancy model to ensure they are out of scope. Steps to take might include collaborating with other interims to ensure the overarching company has multiple clients, developing common methodologies between operatives and having a proper business website. I suspect interims that genuinely operate in change orientated roles will come out lower risk in the new tests, those that routinely cover vacant substantive posts will find it difficult to score the points to get into low risk brackets.
Interim service providers have historically always worked hard to protect their interims from IR35 legislation, and the main tool we can use is the contract, and ensure it has appropriate clauses distancing the interim from any characteristics of employment. But I suspect in the new objective tests, the contract will be only one measure of determining whether an individual is in or out of scope. Previously the position of liability in determining whether a PSC was in scope was down to the interim themselves, under the new measures the liability shifts across to the agent or engaging organisation, and as such I will want to apply the tests as objectively as I can to minimise my own position of liability with HMRC. As it is, where an interim is deemed in scope agencies will need to get ready to start deducting tax and NI to pay to HMRC, which is not something agents in the interim world are accustomed to doing.
This will not be the end of PSC as had been suggested to me by a couple of people yesterday, but it does represent some subtle changes to the way in which the market operates. Interestingly the same rules do not apply to private sector organisations engaging PSCs, which is likely to leave public sector organisations lamenting the loss of more commercial orientated interims who start to gravitate towards private sector interim roles over public sector interim roles. I have blogged before on the narrowing gap between the overall benefits of employment vs working as an interim, and new measures above serve to narrow that gap further. In fact the preceding line in the budget, no 2.39 was also another blow for the industry, stating that “the government will introduce legislation in Finance Bill 2016 to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary”. So one of main financial benefits of working as interim is about to disappear. Its likely interims will get more fussy about working closer to home to minimise expenses, or they will charge the end client a higher “all in” rate to compensate for the lack of tax relief on the expenses they incur.
As with NHS price cap guidance, this isn’t about tackling the majority, I suspect part of the government’s motivation in changing the rules is to avoid the high profile cases of individuals genuinely abusing the system and sitting for years in posts whilst earning through a PSC. The legislation should be inescapable for the outliers and exploiters but the rest of the market need to expect some turbulence aswell.