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What’s the impact of COVID-19 on off-payroll working (IR35) in the public sector?

3rd April 2020

Whilst there has been a twelve month deferral of the new legislation for off-payroll working (commonly referred to as IR35) for private sector companies until 6 April 2021 as a result of corona-virus, there are still issues for public sector bodies.

Public sector organisations including local authorities, their subsidiaries, higher and further education institutions and academy schools have been applying the off-payroll working regulations to their contractors since 6 April 2017.

The contractors affected by these rules are those who trade through limited companies (umbrella or personal service companies) but who, based on HMRC’s employment status rules, should be treated as employees for tax purposes. These workers will have been subject to PAYE by the public sector body on the payments made to them for the services provided through their personal service company.

The Cabinet Office has issued guidance to public sector bodies that payment of suppliers should continue during the COVID-19 pandemic and have issued specific guidance for what they are referring to as “Contingent Workers” which includes workers engaged through umbrella or personal service companies.

The guidance in summary states that if you have applied IR35 and are treating the individual as an employee for tax purposes: -

  • If the worker can work from home they should do and be paid as normal;
  • Where the worker is affected by COVID-19 either through sickness, self-isolation or where the workplace is closed and they are unable to work from home they should be paid 80% of their normal rate up to £2,500 per month.  This would be subject to PAYE and processed through payroll as normal and can be backdated to 1 March if needed. 
  • Workers who cannot work because of childcare responsibilities during school closures can be paid on the same basis for up to 7 days whilst they make alternative childcare arrangements.

The other key point to note is while these workers are taxed as employees they are not employees for employment law purposes so the public sector body is not able to reclaim these costs through the Coronavirus Job Protection Scheme.  The individual contractors are also not eligible for support under the recently announced Self-employed Income Support Scheme.

The guidance, which can be found here, also contains several worked examples showing the calculation methodology for those earning more or less than the £2,500 per month cap and depending on whether rate of pay is based on a daily or hourly rate. Workers should submit a timesheet of expected working hours, and where there is uncertainty it may be necessary to estimate the hours based on average hours worked in the past.

As this is an extremely technical area, any academy school or other public sector body with queries over the status of any particular individual should contact their usual Bishop Fleming advisor.

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