Reform of Intermediaries Legislation

Reform of Intermediaries Legislation (IR35) – Off payroll working in the Public Sector (effective from 6 April 2017)

Overview of the Reforms

In recent years there has been an increasing use by both the private and public sector of contractors, who have provided services either as self-employed individuals or through limited companies (often referred to as Personal Service Companies or PSCs). HM Revenue and Customs (HMRC) have been concerned that self-employment and PSCs have been used to avoid PAYE and NICs and have focused their attention on this area.

On 6 April 2017, reforms in Tax legislation take effect which impacts on how the University pays certain suppliers.  The legislation is referred to as the Intermediaries Legislation (IR35) or also sometimes known as ‘Off-Payroll working’. The reforms result in increased responsibilities on public sector organizations. For the purposes of this legislation the University is deemed to be a public sector organization.

It is critical for the University to establish the correct tax treatment before the services have been provided.

What is a PSC?

The generally accepted definition of a PSC is a limited company that typically has a sole director, the contractor, who owns most or all of the shares. The contractor’s PSC generally supplies professional services to end user clients, either directly or via an agency. The professional services are delivered by the contractor who is also the owner and director of the business.

What do the Reforms mean in practice?

The reforms require Universities and other public sector bodies to assess whether or not any individuals who supply services to the University as an individual sole trader or via an intermediary (such as a personal service company (PSC), partnership or an agency) fall within the new IR35 rules.

Prior to the 6 April, the individual or agency were responsible for determining whether PAYE and National Insurance was due.  From 6th April 2017 the responsibility to determine the employment status (for tax purposes) of such individuals will transfer to the University.

If the individuals providing the services meet the new HMRC criteria, the University will be required to pay for the individual’s services via payroll and the University will need to deduct PAYE and National Insurance from invoiced payments.  As a result, the University will also have to pay the employer liability, approximately 15% of the cost of employing such individuals.

The changes will affect all payments made on or after 6 April 2017, even if the payments are related to services provided before then.

Importance of compliance

When the University pays a sum of money for service(s), consideration must be given to whether the Off-Payroll working rules allow those payments to be made gross or whether there is deemed employment for tax purposes.

Deemed employment status is not a matter of choice, it cannot simply be decided that someone is not an employee for tax purposes because the individual wishes to be paid gross or that the University wishes to pay them that way. It is not conclusive to just call or consider someone self-employed or to interpose a limited company, partnership or agency between the University and the individual; it is the reality of the relationship between the University and the individual that matters. There is no statutory definition of ‘deemed employment’ or ‘self-employment’ and each case has to be looked at as a whole with all the factors considered. However, it is the University’s responsibility (not the individual’s) to determine the correct status properly. If the correct status is not applied the University will be liable for any unpaid taxes and NICs, which could also result in a liability to pay penalties and interest.

It is worth bearing in mind that just because a person is not a deemed employee for the purposes of one contract, it doesn’t necessarily mean that all their contracts will follow suit. The individual can still be considered ‘deemed employed’ for the purposes of another contract with the University at the same time It is also possible that an individual who is properly considered not to be a deemed employee when they begin providing services to the University may over time become increasingly integrated into the University to the extent that their status may change to that of a deemed employee.

How has the University prepared for the legislative changes?

The University has undertaken a review of all the suppliers currently held on the Financial Management System (FMS) and identified suppliers who provide their services as a sole trader or via an intermediary. As these suppliers may be affected by the new legislation HMRC require that employment status checks are undertaken, and the University is using HMRC’s new online Employment Status Service (ESS): HMRC Employment Status Service, as the mechanism to help clarify employment status for tax purposes. This ensures that we pay our suppliers correctly from 6 April 2017.

A key element has been engaging with all suppliers whose status for tax purposes has changed as a result of the new legislation and therefore the mechanism to pay these suppliers is also required to change for payments made to them from 6 April 2017.

What is HMRC’s Employment Status Service (ESS)?

The ESS is an online assessment tool which asks questions in relation to the practical day to day working of the relationship that the individual has with the University department who has engaged them.  HMRC released the ESS in March 2017 and have also only just clarified a number of key points in relation to the use of the tool and its status outcomes. 

The ESS must be completed by the individual who best understands that day to day working relationship.  The ESS will generate an employment status outcome for tax purposes, based on the answers selected, and that outcome will then help ensure that the supplier is paid using the correct payment method, compliant with the new legislation. 


It is essential that the sourcing of any new suppliers is undertaken in compliance with the University’s procurement regulations and that the employment status of any new supplier, required  to be assessed under the new legislation, is undertaken prior to the commencement of any services being provided. This applies equally to suppliers requested to be enabled on FMS or suppliers paid via the Request for Payment form route.


ESS Outcome : Departmental Action and Supplier Payment Method


ESS Assessment of Employment Status

(for tax purposes)

Departmental Action Required Supplier Payment Method 
 Employed Contact your HR Manager

Likely to be via Payroll with PAYE and National Insurance deductions, however under certain circumstances submission of  invoices which will be paid by the Payments Team without PAYE and National Insurance deductions, may be appropriate.

 Self Employed Notify the Supplier of the ESS outcome

Supplier can submit invoices which will be paid by the Payments Team without PAYE and National Insurance deductions.
This applies to both FMS and non FMS enabled suppliers.

 Intermediary legislation applies Notify the Supplier of the ESS outcome Supplier can submit invoices to the Payments Team.

Invoice required to specify separately
(1) Cost of Services
(2) Cost of Materials (where relevant)
(3) Cost of Expenses (where relevant)
(4) VAT (where relevant)

Element (1) of the invoice is required to be paid via the Payroll with PAYE and National Insurance deductions and elements (2)-(4) where relevant, are required to be paid via the Payments Team.

This applies to both FMS and non FMS enabled suppliers.


Notify the Supplier of the ESS outcome in order to clarify any of the ESS questions.

Re run the ESS assessment.

If the outcome is still deemed to be ‘Undetermined’ contact the HMRC Helpline as well as submitting a copy of the outcome to stating ‘ESS Outcome’ in the email subject header.

For suppliers affected, the employment status must be clarified in order to correctly pay the supplier under the new legislation.

Where the resolution of the employment status is being considered by HMRC the University may choose to pay the Supplier an advance of approx. 65% of the total sum due.


Off-Payroll FAQs

Click any of the questions listed below to see the answer.


If the supplier is only or predominantly providing goods then an ESS assessment is not required. If the supplier is providing services but also some materials then they could be affected by the new Off Payroll Worker legislation and an ESS assessment is required.

Sole traders need to be assessed as to whether they should be treated as deemed employees for tax purposes. Prior to the recent reforms, sole traders’ employment status for tax purposes, was required to be assessed using HMRC’s previous employment status indicator toolkit.

If you have never engaged the services of a particular FMS supplier then you will be required to undertake an employment status check using the ESS before you engage with them. How a supplier interacts with one department, may be different from how they interact with another department, depending on the nature of the engagement. Where your department has assessed the employment status based on a particular engagement and that supplier is used again for the same type of engagement, the ESS is not required to be undertaken again. However, if the type of engagement changes, even if you have used the Supplier previously, HMRC require a new ESS assessment to be undertaken for the new engagement.

Preferred agencies have been informed that any workers they send will be treated as Off Payroll Workers and that we expect the Agency to account for PAYE and NI on any amounts they pay to such workers.

If payment for the services will be on or after 6 April 2017 then the new legislation will apply and an ESS assessment will be required. This applies to FMS suppliers as well as suppliers paid via the Request for Payment form.

Yes. The outcome of the ESS assessment should be notified to the perspective supplier. The full ESS document outcome can also be shared. In some instances this can provide a useful mechanism to resolve any points of clarity particularly where the ESS outcome is deemed to be ‘Undetermined’. The prospective Supplier does have the right to challenge our assessment, however it is the University that is required to make the assessment with the help of the ESS toolkit, not the perspective Supplier. The ESS asks questions in relation to the practical day to day working of the relationship that the Supplier will have with the University department who will engage them.  The ESS must therefore be completed by the individual within the University who best understands that day to day working relationship. In certain circumstances a prospective Supplier who has always viewed themselves to be ‘self-employed’ could still be assessed as ‘the intermediaries legislation applies’ with regards an engagement to provide services to the University, due to the particular circumstances regarding how that engagement will actually be undertaken in practice.

For a new Supplier requested on FMS, the full ESS document containing all the questions and the employment status result should be electronically attached to the New Supplier Request. For a Supplier that already exists on FMS, but which a department has never engaged with before, the full ESS document containing all the questions and the employment status  result, for that engagement,  should be emailed to, stating ‘HMRC ESS Outcome’ in the email subject header. The ESS document will be attached to the Supplier Master file held on FMS, within the document archive folder named ‘HMRC ESS Outcome’. For Suppliers being paid via the Request for Payment form the ESS assessment should be undertaken prior to the start of the engagement and the full ESS document containing all the questions and the employment status result should be attached to the form.

It is highly likely that HMRC will seek reassurance that the new legislation has been correctly implemented by all Public Sector bodies including the University. From the HMRC perspective it is very much related to how the day to day working relationship actually operates between the supplier and the engaging department. When HMRC audit this area, they will note the ESS outcome but will then look for evidence to confirm the answers that were input to obtain the outcome and satisfy themselves that they accurately reflect the day to day working practises of that particular engagement.

Failure to comply with the new legislation will result in the University paying the underpaid PAYE and National Insurance contributions (plus any accrued interest) as well as incurring substantial fines for non-compliance.

There will be information sessions run after Easter explaining the new legislation.

If you have any questions that are not answered on the main web pages please let us know by emailing stating 'IR35 Query' in the subject header.