PAYE and NIC responsibility for personal service companies will shift to employers from April
There are estimated to be more than 250,000 personal service companies (PSCs) in Britain. They are often, but not always, ‘one man band’ operations that provide the personal services of their owners to clients and customers. This type of company is common in, for example, the IT contracting space, and healthcare and energy sectors.
From a tax perspective, providing services through a limited company can mitigate or defer income tax and national insurance contributions (NICs) for their owners. The government has long disliked these arrangements, and the IR35 rules were introduced in April 2000 to try to counter this perceived avoidance. HMRC estimated that the cost of non-compliance will be £440m in 2016-17.
IR35 is designed to require PSCs to subject payments received to PAYE and NICs, which they would otherwise not be. The problem with the existing rules is that they are rarely applied by taxpayers, and HMRC simply does not have the resources to chase payment from all of the PSCs in the UK, meaning that very little tax is actually collected by IR35 in its current form.
However, in less than three months’ time that story is going to change. In April 2017 IR35 will be flipped on its head – at least for the public sector and those contractors working through PSCs providing services to it.
The ‘public sector’ in this context broadly means any government body such as a local council, the NHS, Ministry of Defence, the BBC, Channel 4 and certain other organisations. The requirement for effectively applying PAYE and NICs will pass from the PSC to the public sector engager or agency through which contractors source their work. A public body will have to decide if it is engaging someone who is legitimately self-employed or if the PSC is simply a means for the contractor concerned to receive payments without the deduction of PAYE or NICs. If the public body decides the latter case applies, it – or the agency through which the contractor PSC is supplied – will need to withhold PAYE and NICs. In addition, the body withholding PAYE will need to pay employers’ NICs on the payment.
Public bodies will be provided with an online tool by HMRC (which is not currently available) to decide whether someone is legitimately self-employed or should be subject to PAYE and NICs like any other employee. The legislation bringing in these new changes is still in draft and appears to require a number of changes to make it workable. This is unfortunate for businesses and public bodies, which will be faced with dealing with this from April.
Implications of the new rules
Regardless of the current state of legal drafting, the consequences of these new rules will be wide-ranging and significant.
The promised online tool will no doubt mean a lot of contractors will be brought within PAYE and NICs. In fact, HMRC is probably unlikely to give much leeway for deciding that contractors are anything but employees by another name. This is, of course, because the new measures have the potential to raise significant additional tax revenues.
There is likely to be an increased cost for public bodies, such as NHS trusts, because of the employers’ NICs they may need to account for. While this is going from one government ‘pocket’ to the other (in the case of the NHS, for example) there will be a net cost to individual public body budgets and consequently pressure on the prices that contractors currently charge.
Agencies supplying these types of PSC workers will have to be careful not to fall foul of the new rules. Contracts with clients and PSCs will need to be reviewed and updated. Price pressure could depress margins, or even send these entities out of business if they get a huge bill for PAYE and NICs that they should have withheld because they have misunderstood or misapplied the new rules.
Affected contractors will face larger tax bills and will need to revisit their tax status and business structures.
Initially, the rules will only apply to the public sector, but PSCs are prevalent in the private sector as well. If the new rules raise significant additional revenues, how long will it be until they are expanded?
Mark Fielden is a tax partner at Kingston Smith. Original article on http://www2.cipd.co.uk/