IR35 - Are your payroll costs set to rise from this April?
New rules affecting payroll costs from 6 April 2017 could impact most public sector organisations
Under new rules applicable from 6th April 2017 where a public sector organisation engages an off-payroll worker through the worker’s own personal service company (PSC), the organisation will become responsible for determining whether the IR35 rules apply by identifying and reviewing the employment status of the worker, including one provided via an agency.
If the IR35 rules apply, the fee payer, being either the organisation itself or the recruiting agency if the organisation pays for the worker through one, will need to deduct tax and employee’s NIC from any payments made to the PSC. In addition they will also have to account for employer’s NIC too.
This applies to any payments made now, even if the contract is entered into or the work was completed before the rules changed.
What impact will this have?
This change fundamentally alters the landscape in that the risk of getting the employment status wrong will fall back on the public sector organisation (or fee payer) rather than, as previously, on the PSC itself.
The organisation may have to pay employer’s NIC at 13.8% on the (net of VAT) amount of invoices from PSCs.
In addition, any workers that are affected must be added to a payroll, which may inflate Apprenticeship Levy costs for the organisation too.
What should you do?
It is the organisation that must determine whether the new rules apply to any given arrangement. In addition, there are obligations for organisations to notify any intermediary involved if the rules apply to the contract it has with the PSC.
Where an organisation does not reply within 31 days to a written request from an intermediary as to whether or not the new rules apply, it is the organisation that must then account for PAYE/NIC as if it were paying the fee to the PSC, even where that is not the case.
Points to consider
It is important public sector organisations take account of these changes. There are practical steps that you should consider:
- How will you determine whether a worker is employed or self-employed? HMRC have released an online Employment Status Service tool to help.
- New processes may need to be built in to the take-on procedures for externally supplied workers to manage the risk. A review of current practices also ought to be undertaken.
- Understand what the cost implications are of doing nothing and paying via payroll. In particular, is it appropriate or cost effective to continue engaging with PSCs or can the services being provided be carried out by existing/new employees?
How can we help?
We can assist you with all aspects of the new rules; helping you to understand the changes that your organisation needs to implement to be compliant with the new rules, training your team on what constitutes employment and self-employment, preparing a costing review of how the new rules will impact your organisation, reviewing contractual arrangements in place and providing guidance on what HMRC will look for in a review.
For further information, please contact Patrick Allan on 0121 710 5249.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.