Off-payroll Working IR35 (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 sectors 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 took effect, impacting 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 organisations. 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 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 a sole individual trader or via an intermediary (such as a personal service company (PSC), partnership or an agency) fall within the Off-payroll Working IR35 rules.
Prior to 6 April, the individual or agency was responsible for determining whether PAYE and National Insurance were due. From 6th April 2017 the responsibility to determine the employment status (for tax purposes) of such individuals transferred to the University.
If the individuals providing the services meet 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 did the University prepare for the legislative changes?
In 2017, the University undertook a review of all the suppliers held on the Financial Management System (FMS) and identified suppliers who provide their services as sole traders or via an intermediary. These suppliers were assessed accordingly. A key element was engaging with all suppliers whose status for tax purposes changed because 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 Check Employment Status for Tax text (CEST)?
HMRC require that employment status checks are undertaken, and the University uses HMRC’s online Check Employment Status for Tax test (CEST): HMRC Check Employment Status for Tax, as the mechanism to help clarify employment status for tax purposes. This ensures that we pay our suppliers correctly from 6 April 2017.
The CEST 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 that has engaged them. HMRC released ESS in March 2017, and this has subsequently been renamed the Check Employment Status for Tax (CEST) test.
The CEST must be completed by the individual who best understands that day-to-day working relationship. The CEST 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, and compliant with the new legislation.
The results of the test will be as follows:
- employed for tax purposes for this work
- self-employed for tax purposes for this work
- off-payroll working (IR35) rules apply
- off-payroll working (IR35) rules do not apply
- unable to determine
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 this 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.
CEST Outcome: Departmental Action and Supplier Payment Method
|CEST Assessment of Employment Status
(for tax purposes)
|Departmental Action Required
|Supplier Payment Method
|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.
|Notify the Supplier of the CEST outcome
The 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 CEST outcome
The supplier can submit invoices to the Payments Team.
This applies to both FMS and non-FMS-enabled suppliers.
|Notify the Supplier of the CEST outcome to clarify any of the CEST questions.
Re-run the CEST assessment.
If the outcome is still deemed to be ‘Undetermined’ contact the HMRC Helpline as well as submitting a copy of the outcome to firstname.lastname@example.org stating ‘CEST 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.
Click any of the questions listed below to see the answer.
A CEST assessment is not required if the supplier is only or predominantly providing goods. If the supplier is providing services but also some materials then they could be affected by the new Off Payroll Worker legislation and a CEST 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 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 CEST 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 CEST 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 CEST 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.
Yes. The outcome of the CEST assessment should be notified to the prospective supplier. The full CEST document outcome can also be shared. In some instances, this can provide a useful mechanism to resolve any points of clarity, particularly where the CEST 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 CEST toolkit, not the perspective Supplier. The CEST asks questions in relation to the practical day-to-day working of the relationship that the Supplier will have with the University department that will engage them. The CEST 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 as ‘self-employed’ could still be assessed as ‘the intermediaries legislation applies’ regarding 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 CEST 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 CEST document containing all the questions and the employment status result, for that engagement, should be emailed to email@example.com, stating ‘HMRC CEST Outcome’ in the email subject header. The CEST document will be attached to the Supplier Master file held on FMS, within the document archive folder named ‘HMRC CEST Outcome’. For Suppliers being paid via the Request for Payment form, the CEST assessment should be undertaken before the engagement. The full CEST 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 all Public Sector bodies including the University have correctly implemented the legislation. 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 audits this area, they will note the CEST 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.
If you have any questions that are not answered on the main web pages please let us know by emailing firstname.lastname@example.org stating 'IR35 Query' in the subject header.