How do the off-payroll working rules apply to the public sector?

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## Off-Payroll Working Rules in the Public Sector

### What the law says

**The legislative framework** is found in **Chapter 10, Part 2 of ITEPA 2003**, which governs workers' services provided through intermediaries to public authorities or medium or large clients.

**Definition of "public authority"** for Chapter 10 purposes means:
- A public authority as defined by the Freedom of Information Act 2000 (FOIA), including bodies specified in s.23(3) of FOIA
- A Scottish public authority as defined by the Freedom of Information (Scotland) Act 2002
- The Advanced Research and Invention Agency
- The Corporate Officer of the House of Commons
- The Corporate Officer of the House of Lords
- The National Assembly for Wales Commission
- The Northern Ireland Assembly Commission
- A company connected with any of the above

An authority within FOIA/FOISA is a public authority for Chapter 10 purposes **in relation to all its activities**, even if the relevant Act does not apply to all information held by it.

**Healthcare carve-out:** A "primary-healthcare provider" is only a public authority for Chapter 10 purposes if it has a registered patient list, or is within specific FOIA/FOISA paragraphs by reason of providing primary dental services or general dental services.

**The deemed direct payment mechanism** operates under s.61N ITEPA 2003. Where the rules apply, the client (or deemed employer in the chain) is treated as making a deemed direct payment to the worker, triggering PAYE and NICs obligations.

**Status Determination Statement (SDS):** Under s.61NA ITEPA 2003, a valid SDS is a statement by the client concluding whether the employment condition in s.61M(1)(d) is or is not met, with reasons — but it is not valid if the client fails to take reasonable care in reaching that conclusion.

**Information obligations:** Under s.61U ITEPA 2003, the worker or intermediary must inform the potential deemed employer whether one of Conditions A to C in s.61N is met. If they fail to do so, one of those conditions is treated as met.

**Tax set-offs:** The set-offs legislation (from 6 April 2024) allows HMRC to set off tax/NICs already paid by a worker or intermediary against a deemed employer's liability. For public authorities, set-offs apply to deemed direct payments made on or after **6 April 2017** (the commencement date of Chapter 10 for public sector entities), subject to a trigger event occurring on or after 6 April 2024.

**Intermediary trading profits:** Where a deemed direct payment is made under s.61N(3), the corresponding payment received by the intermediary is **not** required to be brought into account in calculating the intermediary's trading profits.

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### HMRC guidance / practice

**Scope and history:** Off-payroll working (IR35) refers to the Intermediaries Legislation, the **2017 reform** for public sector hirers, and the subsequent **2021 extension** to medium and large-sized private sector hirers. The rules require people who work in a similar way to an employee, but through their own intermediary, to pay tax and NICs like employees.

**Who must determine status:** Public authorities (and medium/large non-public sector clients) are responsible for determining whether an engagement falls within the off-payroll working rules. To do this, the client must understand who the parties are in the contractual chain, make a status determination, and communicate it via an SDS to the worker and any third party it contracts with.

**Consequences of failing to issue an SDS:** If the client fails to pass the SDS to the worker and any third party, the client becomes responsible for deducting tax and NICs and paying the apprenticeship levy to HMRC. HMRC may also treat such failure as evidence of a lack of reasonable care when calculating penalties.

**Deemed employer and PAYE:** Where the client is also the deemed employer, it is responsible for operating PAYE — deducting tax and NICs, accounting for the apprenticeship levy, and paying these to HMRC.

**NHS healthcare providers:** Retail businesses providing ophthalmic and pharmaceutical services on behalf of the NHS are **not** required to apply the public sector off-payroll rules. However, NHS hospitals **must** consider the rules for all contractors working through an intermediary, including those providing ophthalmic and pharmaceutical services. GP surgeries and dental practices providing NHS services are also required to consider whether the rules apply.

**Interaction with CIS:** Where payments are subject to PAYE under Chapter 10 (tax) / Part 2 (NICs), there is no need to consider the Construction Industry Scheme. The CIS only becomes relevant if the off-payroll working rules do not apply.

**Accountancy fees:** Tax advice in relation to off-payroll working in the public sector is **not deductible**.

**Dividends:** If a worker draws a dividend from their PSC that can reasonably be taken to be for services to a public authority, it will be tax-free up to the level of the deemed direct payment. However, the worker must account for income received by their PSC from the public authority on their Self Assessment return.

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