The Chancellor’s 2016 autumn statement confirmed the government’s plans to reform the Intermediaries Legislation, commonly referred to as IR35, this April. There are new measures introduced to ensure those in direct receipt of public funds pay the correct level of tax and national insurance contributions. This includes workers in schools.
IR35 is a complex set of rules concerning employment status that have evolved under case law over the last 100 years, as evidenced by the government’s own lengthy and complicated guidance notes.
According to the recent survey by the Recruitment and Employment Confederation (REC), public sector employers do not approve of the changes to the monitoring and reporting of skilled contractors’ tax status. The survey, based on the feedback from 95 public sector HR managers, highlighted that 69.5% expressed fears that the government’s changes would have a negative impact on NHS, councils and schools, by increasing their wage bill or damaging their ability to attract talented individuals and afford the senior contractors and interims they need to manage local public services. Furthermore, when asked about their ability to assess whether or not a contractor falls within the scope of IR35, 12.6% said they felt the rules were unclear, and just under 40% were unable to say they were confident in making those judgements.
HMRC estimates 90% non-compliance with the previous IR35 rules, in that employers were engaging workers under IR35 when in fact they should be treating them as employees for the purposes of PAYE and National Insurance. Consequently, HMRC states that the new IR35 rules aim to ensure consistent treatment of workers moving forwards, from the perspective of operating PAYE Tax and National Insurance.
IR35 Intermediaries Legislation - What is it?
All public sector employers will be affected by the set of rules known as IR35 that concern tax and National Insurance contributions.
The legislation has actually been in force for a good number of years, but the change from 6 April this year moves the responsibility of determining a contractor’s IR35 status from the contractor, to the end-client, i.e. schools. Interest and penalties can be charged on any extra tax and National Insurance contributions that are owed. Penalties may be more severe if it can be proved that IR35 rules or legislation have been deliberately ignored.
Workers that are paid through an intermediary will need to be assessed to discover if IR35 applies. An intermediary may be:
- The person’s own limited company
- A service or personal service company
- A partnership
Therefore, there is an obligation to check the employment status of any contractor that is invoicing, rather than being paid a salary through the payroll. There is a complex set of rules and criteria to help determine whether any particular scenario is caught by the rules.
Who needs to be aware of the changes in schools and academies?
IR35 does not apply when the worker is being paid as an employee on a school’s payroll, or as an agency employee on the agency’s payroll, and where all payments made to the worker are already subject to the deduction of PAYE Tax and National Insurance by the school / academy, or by the hiring agency.
Agencies will also be affected by the new rules if they supply a worker to a school or academy, who operates through a personal service company. The agency will have to pay the employer’s NICs but the school will have to determine if the new rules apply.
Schools have to use the facts of each contract of engagement to decide if IR35 applies. It is important not to just use a description, or a job title. It will be necessary for school business managers or HR officers to work out an individual’s employment status for each contract, by considering what that relationship would be if there wasn’t an intermediary involved. This practically needs reviewing for each individual contract, so make sure it is considered again if the arrangements change. The impact can be far-reaching considering the external support most schools engage with across an academic year. The new rules may, for example, apply to contracts with educational consultants, sports coaches, peripatetic teachers, and exam invigilators.
An online checker is available to verify the status of any workers. HMRC will abide by that decision, although they will want to check that the answers given are correct. We recommend keeping a copy of the decision for your own records. Before using the online checker, knowledge of the engagement will be necessary, including:
- The contractual basis upon which the worker is engaged
- The worker’s duties and responsibilities
- Who decides what work needs to be done
- Who decides when, where and how the work is done
- How the worker will be paid
- If the worker can use a substitute worker for all or part of the work, and if so then who pays the substitute
- If the engagement includes any benefits or reimbursement for expenses.
Accurate and comprehensive record keeping is highly important in ensuring that decisions made in individual cases, both before and after 6 April 2017, are consistent and can be justified in the context of IR35.
Payroll and HR implications for Schools & Academies
Although contractors impacted by this measure may have to pay tax like an employee, their employment status will not change, so they will not receive the rights and benefits that go with employment such as pension contributions, holiday pay and unfair dismissal rights.
Naturally, the impact on schools of the IR35 rule is that it will increase the wage bills of academies and schools, as they will have to pay employers’ National Insurance Contributions on the contractor payments. This comes at a time when the education sector is already under extreme financial pressure.