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off-payroll - working in the public sector changes to the intermediaries legislation (IR35)

27 July 2017

From 6 April 2017, changes have been introduced to the tax rules where individuals provide their services to a client in the public sector, via an intermediary such as a personal services company (‘PSC’). These tax rules are commonly referred to as ‘IR35’, taken from the reference for the original Inland Revenue press release introducing these rules.

The IR35 rules allow HMRC to look through the intermediary (which is often, but not always, a PSC), and look at the underlying relationship between the worker and the client. If that underlying relationship would be one of employment (essentially ignoring the PSC) or office, then the IR35 rules apply. That can result in employment taxes and National Insurance contributions being due in respect of the payments made by the client for the relevant services provided.

Traditionally, the general position has been that the responsibility for paying any relevant tax/NI falls to the PSC rather than the client. However, the new changes to the rules mean that where services are being performed for a ‘public authority’ (including both maintained schools and academy trusts) that responsibility will now fall to the client paying for the services rather than the PSC.

This means that any public sector school or academy who contract with individuals providing their services via a PSC, and where the underlying relationship between the client and worker is one of employment (for this purpose looking through the PSC), will be treated as the employer for tax and NI purposes and so has to account for the employment tax and NI. If those services are provided via a third party, such as an agency, then it will be the agency rather than the school or academy that will be responsible.

Public sector clients must also inform the relevant party with whom they have a contract whether the contract falls within the new IR35 rules or not. For contracts starting on or after 6 April 2017, this decision should be notified before the contract start date, or before the provision of the services begins. For contracts already in place, the decision should be notified before the date of the first payment made on or after 6 April 2017. This conclusion can be included in the contract or separately. If the public sector client fails to notify its decision within the timescale, they may become liable to account for the tax and NIC.

Identifying employment status

One of the key questions to consider is whether there is an employment relationship between the worker and the client, as this will help identify whether IR35 should be applied. HMRC has an online employment status indicator tool which asks a series of questions to assist you in considering employment status for tax purposes. It has also issued guidance on the factors that should be considered when determining an individual’s employment status. Whilst not exhaustive, the following considerations show what is important when establishing an employment relationship:

  • personal service – in order for an individual to be an employee, they must be obligated to provide their services personally, without the right to provide a substitute. Whilst the absence of a right of substitution will not necessarily make the relationship one of employment, it can be a strong indicator
  • mutuality of obligation – any employment relationship requires an obligation on the school or academy to provide the individual with regular work, and the individual is obliged to make themselves available to do that work
  • control – the school or academy must have control over what the individual does, how they do it and when. This can include considering what would happen to the individual if they don’t follow the instructions (e.g. would they be subject to disciplinary procedures)
  • exclusivity – an employee would not usually be free to work for other schools or academies without express permission. If they are a contractor then they would usually be free to provide their services elsewhere at the same time
  • integration – an employee would be expected to be integrated into the school or academy, for example they have to wear a uniform, have a school email address or their name appears on a list of staff members. Self-employed contractors are more likely to have their own separate contact details/email address and would not usually be grouped together with permanent school staff
  • provision of own equipment – an employee would usually be provided with equipment and materials by the school or academy, whereas a self-employed contractor would generally provide their own equipment.

It should be noted of course that HMRC guidance is just that, and does not give a definitive answer in all cases. Each case will very much be dependent on the specific facts surrounding it. It is also important to remember the label adopted by the parties (for example in contractual documents) will not necessarily be determinative as to the actual status of the relationship between them.

Equally, even if HMRC determines that an individual is self-employed for tax purposes, this does not necessarily mean that they would be treated the same way for employment rights purposes. As such, we would suggest you get legal advice on the particular scenarios in your school or academy.

Case study one

A dance teacher supplies her services to a school, through her own limited company. The school require her to work a specific number of hours a day, and for set classes, so as to fit in with the school timetable. The dance teacher is required to wear a polo-shirt with the school logo on, and is only allowed to take time-off during the holidays like all other staff.

The contract governing the arrangements expressly states that the agreement did not create an employer/employee relationship.

In this situation it is likely that HMRC would consider that there is an employment relationship, due to the level of integration and control that can be seen. The fact that the contract expressly stated that there was not an employment relationship would not in itself be sufficient.

Case study two

A music teacher provides his services to an academy, through his own limited company. He is free to pick his own hours, and dictates when he is available for lessons which take place during a lunch-hour or after school. He supplies all the sheet music and workbooks directly to the students, and also lends them instruments if necessary. This is just one of four academies and schools that he is currently teaching in, and he splits his time between them as necessary.

In this situation it is likely that HMRC would find that there is not an employment relationship here, as the music teacher still retains the majority of the control over the work that he does and the facts would suggest that he was in business ‘on his own account’ and not for the academy.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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