A small but significant number of charities and their wholly owned companies need to take action now to comply with the requirements of the new IR35 rules contained in the latest draft of the Finance Bill 2017.
The IR35 rules were introduced to combat avoidance of employment tax and National Insurance contributions (NICs) by individuals who chose to provide their services to an end client through an intermediary such as a personal service company.
What are the new rules?
The new rules require that whenever an individual provides services to an end client which is a “public authority” through a personal service company (PSC), either directly or via an agency, the public authority will be responsible for deciding whether or not an engagement falls within the scope of IR35. If the engagement is within scope, the person paying the PSC (i.e. the public authority or the agency, depending on the circumstances) must operate PAYE on payments to the PSC.
In effect the public authority needs to determine whether, without the PSC, the individual would be deemed an employee for tax purposes. The public authority has an obligation to inform the party it is contracting with (the PSC or agency, as applicable) of its decision within a strict timeframe. The public authority must also exercise reasonable care in making its employment status decision. Failure to comply with these new obligations will result in the public authority becoming responsible for operating PAYE and paying NICs in respect of the engagement (if it is not already required to do so). This will be a particular concern where the PSC is being engaged through an agency, in which case the agency would otherwise be liable to operate PAYE and pay NICs.
If the new rules apply to public authorities, how do they affect charities?
Unfortunately, the way in which the term “public authority” is defined means that not only are a small but significant number of charities affected, but also their wholly owned companies and joint ventures between organisations subject to these provisions.
The IR35 definition of “public authority” refers to the definition of the same term found in the Freedom of Information Act 2000 (FOIA). Under FOIA there are three ways an organisation may be classed as a public authority. First, the organisation may be listed in the first schedule of FOIA. Second, it may be directly designated by government order. Third, it may fall within the definition of a “publicly-owned company”. The Information Commissioner has published guidance on the definition here.
So, which charities are affected?
The majority of charities are not affected. But, in addition to many universities, the first schedule of FOIA includes such high profile charities as The British Museum, The British Library, the Imperial War Museum, the Royal Botanic Gardens at Kew, and The Tate Gallery. The Universities and Colleges Admissions Service has also been designated as a public authority by a government order in respect of certain of its functions.
What should charity trustees do if they think their charity is subject to the new rules?
Firstly, read this article for a useful summary of the obligations of public authorities under the new rules and what actions now need to be taken. Then, if you are still unsure as to whether the new rules apply to your charity, seek legal advice as a matter of urgency.
Posted on behalf of Nicola Brown, Partner and Carrie Ferris, Associate