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Tax changes for public sector contractors

If you provide ‘off payroll’ services to public bodies such as universities, government agencies, schools, the NHS, BBC or Armed Forces, you need to be aware of tax changes affecting you from 6 April 2017. Yvonne Jackson of Clayton & Brewill explains.

The government is hot on the heels of individuals who seek to ‘disguise’ employment by providing their services through a limited company. Since 2000 the IR35 tax legislation has been in place to ensure that individuals pay the correct amount of employment tax and National Insurance contributions, unless they are genuinely self-employed.

The liability for working out the employment relationship has rested with the individual – together with paying the right amount of tax.

However, from 6 April 2017 a new set of tax rules will mean that individuals working through their own company to provide services to public sector bodies will no longer be responsible for deciding whether or not the IR35 rules apply to that particular contract.

Instead, it will be the public body that will have to decide if the rules apply to the contract and the public body will then deduct the tax at source.

How does HMRC define a public body?

The new ‘off-payroll’ tax legislation will affect individuals providing services to:

• Government departments, legislative bodies, armed forces
• Local government
• NHS
• Schools and further and higher education institutions
• Police
• Other public bodies – eg: the BBC, Channel 4, British Museum
• Publically owned companies (wholly owned by the Crown and/or the wider public sector such as Transport for London)

How will it work in practice?

HMRC has said it will introduce ‘clear, objective tests’ for public sector employers to use when hiring contractors to help them identify any engagements that will be caught by the rules. Where cases are less clear-cut, there will also be a digital tool to give a ‘real time HMRC view’ on whether the IR35 rules need to be applied.

The public sector employer will then need to calculate the correct amount of tax and national insurance contributions by working out an amount of deemed employment income – ie: the amount paid to the contractor, less any VAT that is charged.

The employer will then deduct the tax at source (as it would for an employee) and pay it directly to HMRC.

This means that contractors will need to provide their public body clients with all the necessary personal, company and tax information.

The government has provided these examples to show how it will work in practice:

Central Government employing a locum – rules do apply

Grace works through her own limited company and is appointed as a senior analyst at the Ministry and is to work as a locum for five months until the post is filled with a permanent member of staff. Human Resources uses HMRC’s online tool to see that Grace is working in the same way as an employee and the new off-payroll tax rules apply. Payroll are informed and tax and NICs are deducted from payments made to Grace’s PSC. The Ministry pays the secondary NICs and accounts for the tax and NICs liabilities under RTI.

Grace invoices the Ministry monthly for £2400, which includes £400 VAT. The Ministry treats £2000 as Grace’s earnings and deducts £223 tax and £159 employee NICs, which it pays to HMRC via RTI with £183 employer NICs. The Ministry pays Grace’s company £1618.*

Because Grace has paid income tax on income going into the PSC, she receives a credit against employment and dividend income drawn out of her PSC so she does not pay tax twice. The corporation tax liabilities of Grace’s PSC will remain unchanged by the measure.

Local Government using an agency – rules DO apply to the agency

Charlie is a locum social worker within the Child Protection team at a County Council. The Council contracts with an agency to supply Charlie for 9 months. He is not an office holder under the Local Safeguarding Children Board Regulations (otherwise he would be automatically required to be on the payroll under the current legislation). The agency contracts with Charlie’s company. The agency checks HMRC’s new tool to see what the tax position is and finds that the off-payroll rules apply.

The agency must deduct tax and NICs on the payments it makes to Charlie’s company. Charlie charges the agency £1500 per month for his services and his company is not registered for VAT. The agency treats £1500 as Charlie’s earnings and deducts £123 tax and £99 employee NICs. It accounts for this via RTI and pays the tax and employee NICs to HMRC along with £114 employer NICs. Charlie’s PSC receives £1278.*

Charlie receives a credit against employment and dividend income drawn out of his PSC so he does not pay tax twice. The corporation tax liabilities of his PSC will remain unchanged by the measure.

Contractor – rules DO NOT apply

Tanya is a graphic artist with a number of clients. Tanya’s company tenders for work and is hired through her company by the County Council to decorate schools with attractive murals.

When it engages Tanya, the Council’s contracting department uses HMRC’s online tool to check if the new rules apply to Tanya. The tool asks some questions about the engagement and advises the engagement would not have been one of employment if the contract had been directly between the Council and Tanya. No further action is required.

There is no change in the taxation of Tanya or her company.

*note that these examples don’t include 5% expenses. HMRC is currently consulting on this.

What happens next?

The legislation will be introduced in the Finance Bill 2017 and will be subject to consultation – including which public bodies will be affected by the rules.

It is clearly going to mean a major change (and not a small amount of hassle) for anyone providing services through a limited company to public bodies and also for the engaging companies themselves.

Our presumption is that a similar set of rules will then be rolled out to private sector contractors. Watch this space!

If you think this forthcoming legislation will affect you, please do get in touch. Contact Yvonne at Clayton & Brewill on 0115 950 3044 or click here to send Yvonne an email.