By Clare Munro, Tax Partner
020 7490 7766
We keep hearing that increasing numbers of people in the UK are working on a self employed basis – (the so called “gig” economy, see our blog 17 February 2017 https://www.lubbockfine.co.uk/blog/gig-economy-what-it-and-should-we-care) rather than holding permanent jobs. Many set up their own companies to do so or work through a managed service company which takes care of the administration for them. For sometime now, the Government has been trying to crack down on disguised employment which it sees as depriving it of tax and national insurance revenues.
The latest round in this battle takes the fight to those operating as contractors in the public sector and to the public sector bodies and their agents who make the payments. The new rules take effect for payments made after 5 April 2017. Those affected may want to review or renegotiate the relevant contracts.
The key change is in terms of responsibility for deciding whether the off payroll rules should apply and for actually applying PAYE. At present where a contractor/worker supplies his services through a Personal Service Company (PSC) in circumstances where there would have been employment but for the existence of the PSC, the individual contractor, as a director of the PSC, has responsibility for deciding whether the IR35 rules should apply.
For payments made to a contractor on or after 6 April which can reasonably be attributed to a ‘public sector engagement’ then the responsibility shifts to, either the public sector body, if it pays the contractor’s PSC directly, or an agency paying the PSC otherwise. So either the public sector body or the agency has responsibility both for deciding if the payments are in scope and for operating PAYE on them.
However, this doesn’t mean that every public sector contract payment has to have PAYE operated on it. Fully contracted-out services delivered in the public sector are not within this regime, so it remains the case that anyone supplying services, as opposed to workers, to a public sector body should not be affected.
For concerned businesses or contractors, the first issue is whether the contract is with a public sector body. These are defined by reference to the Freedom of Information Act 2000. This definition covers government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service.
Application to consulting firms rather than personal service companies or agencies is a key limit on the scope of the new rules. Where the contract is to supply a service rather than a worker’s services then the new rules do not apply. It is therefore important to consider what the contract with the public sector body is actually for. If it is a contract for work rather than workers, then the arrangements might well be outside the scope of the new rules.
If a situation is in scope for the new off payroll rules then it is the fee-payer that has to make the decision as to whether the changes apply and to operate payroll taxes. HMRC has set up an online employment status determination tool which is anonymous – see https://www.gov.uk/guidance/check-employment-status-for-tax?user=guest.
Ultimately if the rules apply then the payer not only has to make payroll deductions at source but will also be liable for employers' national insurance, adding 13.8% to the cost. It would therefore be prudent to review contracts now.
If you are affected by this issue and need any further help, please speak to your contact partner or to Clare Munro.