New contractor tax rules due April 2017
The intermediaries’ legislation (better known as IR35) introduced back in 2000 sought to end differences in the tax treatment of off-payroll workers – such as IT contractors – and a business’s directly-hired employees. The idea was that if contractors would have been taxed as employees had they been engaged directly, they should be treated for tax purposes as if they were employees of their client.
For the most part IR35 did not secure these objectives. Now the government is looking to clamp down on tax avoidance by off-payroll workers in the public sector. A consultation is currently underway, seeking views on how the reformed set of rules would work, and how they might operate more effectively within public sector organisations.
Look out for changes in April 2017
From April 2017, responsibility for deciding whether IR35 applies to contractors working in the public sector will shift away from the contractor to the public sector employer or the ‘Relevant Engager’ (a third party - such as a recruitment agency - that pays the worker’s intermediary). The new rules will mean:
Where a public sector employer engages a contractor through an employment agency, that agency will be the Relevant Engager.
In turn, the agency must collect and pay the relevant tax and National Insurance contributions through the HM Revenue and Customs’ Real Time Information (RTI) system (the method of PAYE reporting that started for most employers in April 2013).
Where a contractor is engaged through a chain of agencies or other third parties, the party closest to the worker’s limited company in the supply chain will be the Relevant Engager.
How payments will be calculated
When the new scheme comes into effect, the engager – most often a recruitment agency - must calculate an amount of deemed employment income and earnings for National Insurance contributions. It is thought that this will involve:
The payment made to the intermediary, less any VAT charged and a 5% deduction.
This reflects the existing rules which apply to a company’s People of Significant Control (PSC), the register of individuals or legal entities that have control over Limited Liability Partnerships.
The balance is then included for RTI purposes and returned to HM Revenue and Customs.
The new rules state that, to operate RTI, the Relevant Engager must obtain all necessary information from the worker’s PSC and treat all expenses and other allowable deductions and allowances as if it employed the contractor directly. Responsibility for paying employer NICs on this income will also shift to the Relevant Engager.
The government’s commitments under the new rules
To help employers, contractors and agencies navigate this new legislation, HMRC has set out a series of promises. We can expect them to:
introduce clear, objective tests so employers can quickly identify engagements that are clearly caught by the rules at the point of hire
develop a simple digital tool that gives employers engaging an incorporated worker a real-time HMRC view on whether the intermediaries’ rules should be applied.
In the meantime, the government consultation – which relates to how rather than whether these changes will be implemented -- invited views from stakeholders on the impact of the changes, the development of the new test and tools and how the 5% expenses deduction would work in practice. The government will now consider whether to implement changes in April 2017 or not.
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