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April 2017 tax changes to affect the supply of Personal Service Company (PSC) workers

In the summer of 2015, HM Revenue & Customs (HMRC) proposed changes to how it will deal with the engagement of workers who provide services to the public sector via personal service companies (PSC) and who do not go through the payroll of either the public sector organisation or the business agency who supplies them. The changes will affect any payments made on or after 6 April 2017 (regardless of the period to which the payment relates).

Current position

At present, a PSC must decide at the end of the tax year whether or not its engagement (via its owner/ director) is deemed as “employment” or not within the scope of the infamous IR35 rules.

If there is “employment”, any profits (after the deduction of 5% for administration costs) are classed as “income” for which the PSC must account for tax and national insurance.

Any employment intermediary, such as an employment agency, is not currently required to make any such deductions before it pays the PSC, unless it is clear that there is direction, supervision and control for that assignment.

The Change

From 6 April 2017, where a payment is received by a PSC for directly or indirectly providing services to the public sector, this will not be covered by the current IR35 rules and instead new tax provisions will apply.

Any intermediaries (such as employment agencies) will have to operate PAYE/NIC and any apprenticeship levies applicable, without the current 5% deduction, which will be removed.

Where more than one agency is involved, it will be the one nearest to the PSC that is required to operate the new rules. If the worker is engaged via an overseas agency, with no other UK connection, then the responsibility rests with the public sector organisation.

This clearly means there will be additional costs for agencies operating in this space.

However, operating PAYE on workers under a PSC in this context will not necessarily expose the agency to picking up employment rights for such individuals, e.g. unfair dismissal rights etc. as this is governed by a different test to that which applies for the tax position. Furthermore, the PSC will continue to be responsible for auto enrolment and payments such as sick pay.

*Please note that the new off payroll rules will override any provisions in the Construction Industry Scheme rules.

What is the “Public Sector”?

The definition of “public sector” is wider than the common perception but covers all organisations that are covered by the Freedom of Information Act 2000 – such as the BBC, Channel 4, the armed forces, Schools and other educational establishments as well as the normal Government departments, NHS, Fire and Police forces.

Who is responsible for determining if the new rules apply to the contracting arrangement?

The public sector organisation is responsible for determining if the person providing the work is caught by the new rules and it must notify any agency, involved in the payment chain, of its decision.

To determine if the new rules apply it will be necessary for the public sector organisation to consider if:

(a) the worker is required to do the work personally, and
(b) does the public sector organisation decide or have the right to decide how the work should be done?

If the answer to both questions is “yes”, the rules apply.

If the answer is only “yes” to one of the questions, it will be necessary to use a new digital tool to determine if the worker is caught by the new rules.

At the time of writing this, the new digital tool is in course of development but HMRC has stated that it will be ready by the end of February 2017. Unfortunately, this will leave the public sector little time to make an assessment and even less time to communicate its findings to the employment agency.

Next Steps

For any agencies caught by the above, it will be necessary for the relevant PAYE/NIC to be accounted for on a timely basis to avoid both interest and penalties being levied.

Agencies should consider:

  1. Where the Public Sector Body has failed to notify the agency of its decision or if the agency wants to ask questions about how the decision was made, it can ask the public sector to provide further information and the organisation will have 31 days to respond. Agencies must therefore have processes in place to request for decisions to be delivered promptly to them or to ask questions if they did not expect the worker to be caught.
  2. Reviewing the take on procedures to ensure that amounts relevant to PAYE withholdings can be processed through the payroll and in accordance with the requirements of Real-Time Information (“RTI”). Consideration may need to be given to when payments are to be made so that the “on or before” requirements of RTI can be met.
  3. The processing of the correct VAT position, where the worker’s invoice incorporates a charge for VAT.
  4. How the “purchase ledger” and “payroll” systems will interact when these invoices are processed?
  5. Do the current arrangements / contracts in place allow for the agency to recover any additional costs (i.e. those that they will now be required to calculate and withhold PAYE/NIC from the payments and remit these to HMRC, together with employer NIC and any apprenticeship Levy) from the PSC or the Public Sector Body?

As part of our specialist TRRRIM (Tax Risk, Reputation, Resolution Irwin Mitchell) we would be delighted to provide further guidance on this matter and to assist those involved with implementing the changes required.

If you have any further questions, please do not hesitate to contact:

Paul Spenceley
Tax Manager
E: paul.spenceley@irwinmitchell.com

Padma Tadi
Associate Solicitor
E: padma.tadi@irwinmitchell.com

Key Contact

Padma Tadi