Public sector given guide on contractor tax affairs
The steps public sector outfits must take to ensure contractors they engage are meeting their tax obligations have been formally unveiled, alongside contractual clauses to illustrate this new 'assurance' processes.
Writing in Procurement Policy Note 07/12, the government confirms that the new guidance is the result of the Treasury's chief secretary’s review of public sector appointees, which found 2,000 cases of tax payments being minimised.
In response, the Cabinet Office says the most senior staff at state-run bodies must now be on the payroll, unless there are exceptional circumstances, which will require approval from a state accounting officer and cannot last longer than six months.
If the worker is classed as ‘self-employed’ for tax purposes, the engaging body should confirm that, as of the 6-month point, the individual is registered to pay tax – achievable by getting the worker to provide accounts or form SA250. No further action is then required.
But where the worker’s engagement lasts longer than six months, the engaging body has the contractual right to seek assurance that the worker is meeting their income tax and National Insurance obligations, where being paid more than £220 a day.
Such assurance, applicable where the worker in not paid through the body’s payroll, can be sought whenever the engager sees fit – at the start of the contract, at the six-month point or before. Refusal from the worker to comply spells termination.
Engagers, adds the guidance, have the option of extending this assurance requirement to its other contractors as the engager believes appropriate – likely, given that implementation of the new processes will be “monitored carefully” with “financial sanctions” for bodies that fail to comply.
If running their own limited company, the assurance requirement affords the worker four options – the PSC owner can operate IR35; treat all income as salary, use HMRC’s contract review service to establish IR35 does not apply, or provide other evidence they are not IR35-caught.
When such non-PAYE individuals are approached for assurance, they should firstly be asked to show that their PSC is categorised as ‘low risk’ under the IR35 business entity test, within a period of 20 working days around the six-month point of the contract.
But if the worker’s limited company is ‘medium’ or ‘high’ risk under HMRC’s business entity test yet feels they are not caught by IR35, the worker must “provide assurance in a different way,” such as by using HMRC’s contract review service.
As many contractors are expected to fall into the high or medium risk bands, contracting group PCG has advised such PSC owners to consider getting their contract reviewed by a specialist, as a review stating an outside IR35 position should be deemed “acceptable” assurance in the engager’s eyes.
“Contract reviews are thorough assessments of the legal standing of your contract with regards to IR35,” PCG added. “However, if your end client will not accept a contract review as sufficient assurance, ask them why, and what other options you have.”
Elsewhere in the Cabinet Office guidance, the course for PSC owners who are willing to treat all income as salary is spelt out. “If the contract is within the scope of IR35, the worker can provide evidence that they are operating the IR35 legislation on the payments received from the Department,” the guidance says.
“This can be evidenced by the worker providing a ‘deemed calculation’. This is a calculation that requires the worker to consider all the income for the year from a particular contract that is within IR35, make a ‘deemed payment’ to HMRC for employer NICs and pay employee NICs and PAYE on the remainder of the income.”
Perhaps most crucially, and with all four options facing the limited company owner, if the engager “is not satisfied with the evidence they receive [from the worker they have engaged] they may send [the worker’s/individual’s] details” to HM Revenue & Customs.
The guidance note, aimed at all government departments and state-run bodies, concludes with a list of contractual clauses that, for illustrative purposes, they can use to reflect the new processes, which the Treasury and Cabinet Office will scrutinise in April next year.
PCG reflected: “This is a new process and it will take time before government departments and their executive agencies are fully aware of their responsibilities.”
Editor's Note: Further Reading - IR35 in the public sector - a contractor's guide