Since 6 April 2017, new rules apply to public sector bodies, including academies, on the tax treatment of workers who are not on the payroll.
The rules aim to stop the perceived avoidance of PAYE and NI contributions through the use of intermediaries, usually a personal service company (often referred to as IR35). This could result in higher PAYE and NIC liabilities on academy trusts.
Academies responsibility
It is now the academies responsibility to determine if the rules apply to the worker and deduct PAYE/NIC accordingly. This is a shift of responsibility, as previously it would have been up to the individual working through an intermediary to determine their employment status for tax purposes.
Academy workers it could apply to
The new rules could apply to any workers not employed via the payroll including; music teachers, temporary teachers, educational consultants and external sports coaches.
Contracts should be reviewed to ascertain whether there is an intermediary in place and if so whether the individual would have been treated as an employee if it wasn’t for that intermediary. The ‘intermediary’ is most often a personal service company, but it could also be a partnership or another individual.
How to decide if PAYE/NIC should be deducted
There are a number of tests to identify the individual’s employment status including, who is providing the main materials and equipment, does the individual decide what work to do and how, when and where the services are provided etc.
HMRC’s employment status indicator tool can be used to help determine the position on a case by case basis. Providing the information input is correct, HMRC will stand by the decision given under the indicator tool. A record of the answers given and HMRC’s opinion can be printed following completion of the questionnaire. This can be used in support of any future enquiry by HMRC. If it is determined that the individual would have been an employee if it wasn’t for the intermediary, the academy must operate PAYE and NICs as if they were an employee.
The calculation of the liability is not straightforward as the deemed employment income will need to be calculated. This is, broadly, the amount paid to the intermediary, less any VAT, direct costs of materials incurred and certain expenses.
Action to take
We would recommend that academies review their processes for determining employment status and update as appropriate.
In addition, it will be important to review any contracts for the supply of services to identify any workers who are employed off the payroll via an intermediary to determine and document their employment status.