Latest Article: PSC's to be Responsible for Operating Off-Payroll Tax Rules
Posted by: Matt on Apr 18, 2016
What the government plans to do with public PSCs
From April 2017, the government proposes to make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll personnel working through limited companies in the public sector.
The key proposals are:
- If you work for the public sector, through your own limited company, the business that pays your company (let’s call them ‘the Agency’) will have to assess the status of your working practices, which they probably don’t at present.
- Where practices are deemed employment, the Agency will deduct income tax and employee's National Insurance (NI) before transferring the net funds to the limited company, which will be a farce!
- Income Tax and NI will be based only after allowing expenses that are available to everyday employees, so expect travel and subsistence to be lost as well.
- HMRC are not convinced that a 5% flat deduction (adopted by the existing IR35 rules) is appropriate and will consult on that part.
- The tax deductions are paid by the Agency to HMRC together with the employer’s NI, which is no longer the liability of your limited company. Which will confuse Accountants, contractors and even HMRC when filing is made. Under current RTI rules, it is going to result in all manner of confusion, let alone adding in Auto Enrolment to the mix.
- Your company will still have to pay corporation tax under normal rules, but if you have taken money as salary or dividends, then an offset will be available to avoid double taxation.
I have to say, that I don’t think HMRC have thought this through properly as it will cause systems and internal HMRC compliance checks to creak at the seams as multiple parties will be paying taxes for different things.
Imagine for one minute that you have a ‘deemed employed’ role, BUT have staff who work for you.
Will you still be able to reclaim the Employer NIC allowance?
Will HMRC seek for you to provide payroll details for yourself?
Under Auto enrolment, which entity pays your pension?
What if you pay yourself via your own business as well, who apportions the allowances?
= A complete mess!
Who will this have an impact on?
It will hit teachers, local authority, social and care workers, NHS workers and all UK and local government workers providing their services via their own limited company. There is no limit to the nature or scope of services provided, so it doesn’t matter whether you work in IT, project management, financial services or anything else for that matter.
The one simple question is: do you work for a public sector body?
What’s wrong with the idea?
In general pretty much everything, but having reviewed the small print and considered the implications, these proposals have some rather glaring anomalies that are not answered in HMRC’s technical note:
- If the employer's NI becomes payable by the Agency, then the contract must already reflect this in its terms and rates (hence the Agency ends up paying more)! As a contract is drawn up typically before working practices are correctly assessable, how will the treatment of employers’ NI be known, therefore, before it can be established where the employer’s liability lies?
- These changes are not changes to IR35 generally, they are referred to as new rules. How can there be simplification if a limited company contractor has to potentially contend with IR35 for non-public sector work, and IR35 ‘the II’ for public sector assignments?
- If the limited company is to be subject to corporation tax in the normal way, then how will retained funds be taxed? The Agency deducts income tax and NI; this does not determine that salary is taken. If the company can only deduct the actual salary paid, then there will be double taxation. This can only be overcome by matching salary deductions with a presumed salary, but that may not reflect actual outcomes.
- This creates a two-tier system. For example, an IT contractor working for Google will be potentially subject to a different set of rules to the IT contractor doing similar work for a public sector body. Care workers in the public sector will be different to care workers in the private sector. Guess what, no one will take a contract role in Public sector and services will go to pot!
Will the Agency be truly experienced and skilled enough to assess status, will they want to take any risk? I know if it were my business, I wouldn’t want to be accountable for the potential risk either way. Will the Agency only be allowed to rely on facts presented by the Public sector department? Will that person or department understand what is relevant?
What does the crystal ball say?
I wouldn’t be surprised if this consultation strays into areas that concern IR35 generally, as HMRC are trying to cattle herd Contractors into one pen anyway. It’s clear from HMRC’s comments that all workers would be able to make use of the status tools so that there will be commonality in the assessment and this could be a precursor to wider changes from HMRC. But, will this become a waste of time like the Business Entity Test that was boasted as something really helpful, but wasn’t and got scrapped!
HMRC and the government are likely to see the public sector as within their domain and will develop and test out new systems, processes and controls on that sector to identify and address any loopholes or gaps; this will be done before rolling the changes out more widely in 2017.
So it seems a pretty good assumption that changes affecting the public sector will be a good indicator of where HMRC views the future of IR35 generally.
I think we all need to start being more vocal about these proposals, equally the heavy handed tax assault on all small business owners needs to be addressed as we will all start to feel more ‘tax pain’ from April 6th this year!
Written by David Hughes
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