From 6 April 2017, payments made to personal service companies (PSCs) for work done by individuals for public sector organisations will have to be made net of any applicable tax and national insurance contributions. This changes the current position, where the PSC is responsible for paying any employment taxes.
In order to establish whether or not employment taxes are due in each particular case, it will be the responsibility of the public authority (or any agency or third party contracting on its behalf) to determine whether an employment relationship would otherwise exist between the individual and the public authority, applying the usual ‘employment status’ test.
When will the new rules apply?
As with the current rules, the off-payroll working rules will apply where the individual would be deemed to be directly employed by the public authority, were it not for the existence of the PSC. The legislation does not apply where, if the contract was directly between the individual and the public authority, the individual would be self-employed using the normal employment status test.
This will include assessing the following factors
- mutuality of obligation;
- day-to-day control;
- written documentation; and
- ability to use a substitute.
HMRC are due to launch a new Employment Status Service before 6 April 2017, which should assist employers in making this assessment.
The new rules will apply to public sector organisations which fall within the definition of a public authority for the purposes of the Freedom of Information Act 2000 or the Freedom of Information (Scotland) Act 2002.
Consequences for public authorities
The obligation to account for employment taxes and NICs will fall either on the public authority where they contract with the PSC directly, or on any agency or third party paying the PSC for the work undertaken for the public authority. If the PSC is contracted through a third party, the public authority needs to notify them that these new rules apply.
In practice, this means that the paying party should deduct income tax and primary NICs from the payment made to the PSC, and also pay employer NICs to HMRC. The amounts will be included for calculating the paying party’s employment bill, feeding into the apprenticeship levy. The amount treated as earnings is the pre-VAT amount paid to the worker’s PSC.
Consequences for individuals working through a PSC
There are a number of implications for the individual and the PSC:
- When receiving payments from the PSC either as a dividend or as a salary, no further tax will be payable on the net amount received by the PSC for work done for a public authority where tax and NICs have already been paid.
- The corporation tax computation should be adjusted so that the PSC cannot claim a double deduction for the costs associated with the engagement.
- The PSC will continue to be able to deduct certain pension related expenses and capital allowances under section 262 of Capital Allowances Act 2001.
- The PSC will no longer be permitted to deduct a 5% allowance in relation to engagements in the public sector.
The change in the payment of taxes by any third party or public authority will not have an effect on the individual’s statutory rights such as statutory sick pay, national minimum wage, pension auto-enrolment, and paid annual leave – these will continue to be the responsibility of the PSC.