Workers working through intermediaries are not subject to the IR35 rules if they are engaged to work in the public sector.
For these purposes, public sector is any organisation which is affected by the Freedom of Information legislation. This therefore includes:
- Government departments and agencies
- The armed forces
- The NHS and more local bodies through which NHS services are delivered
- Local authorities and their departments
- Schools, colleges and higher and further education establishments
- The BBC
- Channel 4
- Publicly owned companies.
The public body (as the end user) is responsible for deciding whether the engagement falls within IR35, and if so, the payer (which may be an agency) must include the payments in payroll, deducting PAYE and NICs from the amounts paid over, and bearing the employer NICs in relation to the payment. No tax or NICs is to be deducted from amounts of VAT.
The net amount received is regarded by HMRC as the turnover of the company rather than the invoiced amount, although company law may require additional disclosures to be made in the company accounts.
The income can be distributed to the employee as net pay, on which no tax or NICs is due – these payments would be reported through the company RTI reports as a non-taxable payment. The company will bear no corporation tax if it has no income other than that received net of tax in this way. If the individual draws the amount as dividends there will be no tax liability, but no refund of NIC will be given.
There is detailed guidance on the responsibilities of all parties involved on HMRC’s website – search for “off payroll working”.