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Off-payroll working in the public sector

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 (the party making payment to the intermediary, 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 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.

From 6 April 2021 these rules will also apply to private sector engagements, apart from those working for small end users. These rules were due to be introduced in April 2020, but were delayed due the COVID-19 pandemic.

It will therefore require medium and large-sized private sector clients to apply the rules in the same way as the public sector. The private sector includes third sector organisations, such as some charities.

The rules apply to all public sector clients and private sector companies that meet two or more of the following conditions:

  • you have an annual turnover of more than £10.2 million
  • you have a balance sheet total of more than £5.1 million
  • you have more than 50 employees

Balance sheet total means the total amounts shown as assets in the company's balance sheet before deducting any liabilities.

There is detailed guidance on the responsibilities of all parties involved on HMRC's website - search for "off-payroll working".

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