Changes to the taxation of consultants or contractors providing their services through personal service companies to public sector bodies took effect in 2018. The revised rules attempt to make sure that tax is collected in cases where the relationship is, for tax purposes at least, deemed to be one of employment.
The way they do this is to place an obligation on the fee-payer that pays the personal services company to check the employment status of the contractor, and then to deduct and withhold tax and National Insurance through the payroll system, if the relationship has the characteristics of employment. In most cases, it will be the public authorities who have the new responsibility, but in some other cases involving agencies, for example, it may be the agency.
At the time the new off-payroll working in the public sector rules were introduced in 2018, many commentators noted the difficulties the changes would cause. Part of the problem is that the changes have caught many by surprise, and many other arrangements simply are not economic after the rule changes take effect.
Under the pre-2018 rules, it was the personal services company that ran the main risk in these sorts of arrangements, as the personal services company would have to operate payroll and deduct and withhold the tax and NIC in the event that the relationship between the contractor and the client were deemed to be one of employment. Accordingly, almost all contracts between public authorities and everyone contracting with them were negotiated on the basis that the public authority or staff provider would not have to bear the cost of employer NIC on payments they made to the contractors personal services company.
In arrangements under which an employment agency was involved, finding consultants or contractors who could provide services to public bodies, it was still the personal services company and not the employment agency that bore responsibility for tax and NIC. This was the case even where the agency received payments from the public authority, deducted its costs, and paid on to the personal services company its fee in turn.
The level of payments set under the pre-April 2017 contracts also usually reflect the fact that the worker was not entitled to holiday pay or sick pay and that the end-client would not have to bear the cost of any employer NIC and Apprenticeship Levy. So when the off-payroll public sector rules shifted the responsibility for employer NICs and operating PAYE to the fee-payer (the 'fee-payer' is the last entity in the chain before the personal services company / the entity that pays the worker’s PSC), the 'fee-payer' entity faced an unforeseen cost.
Where employment status for tax purposes is one of employment (which can be checked using a tool HMRC provide on their website), an agency or the public sector end client will be liable for employer's NIC and will be required to deduct and withhold tax, operating payroll before paying a net amount to the personal services company. That means, in many cases where contractual arrangements envisage a certain fixed amount to be payable, that agencies may not be able to make a profit on their pre-2018 arrangements, if they comply with the law. In such cases, existing contractual arrangements should be reviewed and new ones negotiated and put in place to reflect the post-2018 tax landscape.
Although the Government announced the new rules some time before, many people were not ready then and are still not in compliance now. At Birketts, our team of tax and employment specialists can help public authorities, employment businesses and individual contractors and their PSCs to check they are in compliance with the rules applicable to off-payroll working in the public sector since 2018.
Please contact a member of our Employment team, or Senior Associate John Kahn in our Corporate Tax team.