Off-payroll working in the private sector – what it means for independent schools
Following the delay last year, the off-payroll working rules (also referred to as IR35 rules) for the private sector came into effect on 6 April 2021. These rules apply to all medium to large size organisations, including independent schools.
Most independent schools should have already begun to address the new regime, but given the regular use of contractors, we expect that this regime will continue to impose a financial and administrative burden on the sector.
This article provides a refresher of the rules and the practical considerations independent schools should be aware of several months into the regime.
What do the changes mean?
For independent schools that are not already subject to the 2017 public sector rules, when your school is engaging with individuals, consultants, contractors, or freelancers who provide their services through their own company, your school will be responsible for deciding if tax should be deducted at source (e.g., PAYE). So, if you determine the individual is regarded as an employee and is providing their services directly to your school, then you will need to deduct income tax and employee NICs and pay employer NICs even when the services are provided through a personal service company.
If the school is paying an agency that has the contract with the individual’s personal service company, then the agency would be responsible for the deduction of these payroll taxes. However, the school, as the end user of the services, must tell the agency as well as the contractor, whether the off-payroll working rules apply.
Will these rules apply to all educational organisations?
These new off-payroll worker rules will apply to medium and large organisations and an exemption from these rules is currently available for small organisations.
The main tests for determining whether an organisation is small are taken from the Companies Act 2006.
To be treated as small, two of three conditions need to be satisfied:
- Annual turnover of £10.2 million or less;
- Balance sheet total of £5.1 million or less;
- Number of employees not exceeding 50.
An unincorporated organisation will be considered small if its annual turnover does not exceed £10.2m (known as the ‘simplified test’).
What should I do now?
If these changes apply to your school (i.e. you are not classified as a small organisation), you should review all relationships and contracts held with contractors, freelancers, consultants etc. to determine whether you should be deducting tax at source.
Schools must also have a policy on how to determine employment status for contractors. HMRC recommend that organisations use the Check employment status for tax (CEST) service to determine a contractor’s status. However, there is some doubt whether the current version of the tool accurately reflects the rules. For example, the tool can produce a status determination without considering a contractor’s engagements with other organisations, which has proven to be a crucial factor for determining employment status in recent HMRC tribunals. An expert opinion may need to be sought on the employment status of some engagements, taking into account relevant case law and other relevant guidance.
Furthermore, schools must be aware that incorrect status determinations can arise when applying the same determination to a group of contractors that appear to be similar. Slight differences in working practices can alter the status determination for a contractor, so each contractor’s engagement should be reviewed carefully.
If, after this review and implementation of a status determination policy, you conclude that tax should be deducted at source from those invoicing via a company, your payroll provider will need to be informed. Payroll policy and procedure will also need to be established or mistakes can easily occur if there are no clear payroll processes in place, which take into account new starter checklists, tax codes and the treatment of expenses and material costs. In some instances, schools may prefer to house contractors who sit inside the off-payroll working rules on a separate payroll scheme.
HMRC have confirmed that it would take a ‘light touch’ approach towards errors for the first 12 months of the rules being in operation. This means no penalties will be charged in relation to errors made providing that reasonable care was taken in applying the off-payroll working rules. In order to demonstrate reasonable care, schools must keep clear records of how determinations have been made and who status determinations have been issued to.
What about peripatetic teachers?
Peripatetic teachers, sometimes known as itinerant teachers, have historically been an area of complexity in respect of determining employment status. For example, school music teachers or sports coaches are sometimes engaged as self-employed personnel. However, where they are paid directly by the school and carry out their duties on the school premises, there is a risk that they could be considered employees of the school.
When determining the employment status of peripatetic teachers providing services via their own limited company, careful consideration is required of both the HMRC CEST tool and the specific HMRC guidance that continues to exist for determining the employment status of these individuals. The off-payroll worker legislation will need to be applied to such engagements where these teachers provide their services via a limited company to your school.
What if our school engages directly with individual contractors?
Your school may also engage with the individual as a contractor (i.e., sole trader), rather than with a contractor’s personal service company. The rules applying to sole traders do not change and your organisation will continue to be responsible for determining their employment status.
John Williams, Senior Tax Manager, Moore Kingston Smith