Personal Service Companies and the Public Sector – An unaffordable change?

Wed 16 Mar 2016

In their consultation document in the summer last year, the government estimated that non – compliance with the intermediaries legislation (commonly known as IR35), will cost the Exchequer £430m in tax and NICs receipts in the year and without reform, it expects this loss to continue to grow.

The Chancellor announced at Budget 2016 that it intends to reform the intermediaries legislation, for public sector engagements. It will do this by moving the liability to pay the correct amount of employment taxes from the worker’s PSCs to the public sector body or agency / third party paying the PSC, i.e. the party closest to the worker’s PSC in the supply chain.

Effective from April 2017, the PSC will no longer be responsible for establishing what is the ‘deemed payment’ under the rules under IR35 and paying employment taxes due to HMRC.  This responsibility will instead move to the public sector employer, agency, or third party that pays the worker’s PSC. Therefore, where the public sector organisation engages directly with the intermediary, the public sector organisation will be responsible for operating the new rules and then collecting and paying the relevant tax and NICs and reporting these to HMRC through the Real Time Information (RTI) system.

This is an extension of the current rules on off-payroll workers where many public sector bodies are already required to seek assurance that some of their workers are paying the correct employment taxes.

HMRC has said that it will provide help for public sector employers and agencies with their new responsibilities by introducing clear, objective tests for employers to use to decide at the point of hire whether or not they need to consider the new rules and then to quickly and decisively identify those engagements that are clearly caught by the rules.

But the unspoken question is to ask how the public sector is going to fund the increase in costs that this change represents?  Such arrangements in our experience have been entered into to pass the obligation of reporting and paying employment taxes out of the engager’s hands in the public sector to the PSCs themselves.  This measure will bring the burden of paying of the tax and NICs as well as the administration involved in operating the payroll, back to the engagers in the public sector. How the public sector manages these costs is another question altogether.

We are expecting more details in the consultation document before the summer and will respond on behalf of our clients who are impacted.

Author: Vaneeta Khurana