Off-Payroll in the Public Sector. Additional tax revenue but at what cost?

Accountant Accounting Adviser Advisor 159804

You may have read previous blogs airing my concerns over the proposed changes to IR35 and the impact this would have on the public sector. Well, as predicted, and equally dreaded, the government confirmed the go-ahead in the Autumn Statement and draft legislation was put out on December 5th. 

To get the naming right, what was previously known as IR35 (Chapter 8 Part 2 Income Taxes (Earnings and Pensions Act 2003 (ITEPA)) is now officially Chapter 10 Part 2 ITEPA, or more simply, Off-Payroll working in the Public Sector

This new measure, Off-Payroll working in the public sector, moves the responsibility for deciding if the off-payroll rules apply (same rules as IR35), from the worker’s own PSC, to the public body. This measure makes the public body (or agency if there is one in the supply chain) responsible for deducting and paying associated employment taxes and National Insurance contributions to HMRC as if the contractor was an employee, and paying the contractor net of these obligations. This will apply for all payments made after 6th April 2017.  

This may be all well and good, but as we have seen in the many years since IR35 was introduced, it is such a grey area, that it will be very difficult to make the correct decisions in all cases. And now that liability will sit with third parties, it is likely that most will err on the side of caution and deem the workers to be within the rules. It would be insane to expect a client or agency to risk the liability of unpaid taxes and NI for a third party (of course, contracts could cover these points and require payback but this could be an expensive and drawn-out process.)

And the more I look into what I see as potential issues, the more ill thought and unworkable the whole thing is. For example, a client may make the decision that a worker is outside of the rules and therefore is paid gross as is the current situation. If HMRC then challenges this decision, and deem the worker to be inside the rules, who do you think is liable? The end client for making the incorrect decision? NO. The PSC as it is this party that has gained financially from the decision? NO. It is the agency which had not control or say in the decision!!

For contractors currently working outside IR35 on assignments that the client deems are within the new rules (which are in fact the same rules that applied to IR35 ie vague), will HMRC challenge the PSC’s original decision that their assignment was outside prior to 6th April 2017?

I can confidently say that this is going to have a negative impact on the public sector that the government just didn’t seem to want to believe, even though it was being told from all angles.

  • The public sector will find itself competing on an uneven playing field, struggling to attract the best talent (and in particular, the NHS, who are already hand tied with rate caps – an honourable but faulty attempt to control spend).

  • The Government also seems to miss the fact that contracting does not come with the benefits of employment (sick pay, pension, holidays, maternity pay, employment protection etc) and therefore has to pay more to compensate)

  • Contractors will leave the public sector in droves, diminishing the supply, and pushing up costs even further.

  • Those that remain will require a significant increase in rates to compensate for additional costs.

  • Are contractors really going to want to provide all the information required to enable RTI reporting on their behalf? It was hard enough to get the information required for the HMRC intermediaries legislation reporting (ie home address, DOB, NI etc) from contractors who, for 20 years, were used to just supplying the Ltd co. info.

  • Many large agencies payroll will increase over the £3m threshold for the Apprenticeship levy, even though the credits they will receive cannot be used for these ‘employees’.

And to really ensure the industry struggles to get all their ducks in a row, we have just over three months to get it done.

HMRC believe they are missing out on £400m in taxes from PSCs, but I can be certain that the cost to the public sector and the country will be an awful lot more than that!