In May 2012 The Treasury published its review of tax arrangements for public sector workers. The review outlined the following key recommendations:
- Board members or senior officials with significant financial responsibility should be on the public sector department’s payroll
- The department should review the tax arrangements of those with 6 month contracts and earning £220/day to ensure that they are paying the right amount of tax
The departments were given timescales for implementation and the threat of sanctions (e.g loss of budget) for failing to comply. Public sectors departments seem to have followed the recommendations. The NHS has already issued letters to recruitment agencies and contractors asking about the pay arrangements of contractors.
BIS opted to go further than the recommendations themselves, and are insisting that contractors use a PAYE option only, even if the assignment falls outside IR35.
Q. What are the implications for recruitment agencies?
Agencies will be expected to gather information as to whether workers are paid through payroll, an umbrella, PSC or other solution. A timely response will be expected so agencies with tight PSLs and good relationships with service providers will be at an advantage. Agencies that allow contractors to use offshore schemes will be frowned upon.
Q. What are the implications for contractors?
Those on agency payroll or through umbrella companies should simply need to confirm that they are using a PAYE option. In our experience a letter from the umbrella company or recruitment agency confirming that PAYE and NI has been deducted is sufficient to satisfy the public sector department although some also ask to see payslips.
Those working through PSCs will need to produce evidence that either:
- He is paid on PAYE basis ie all salary.
- He has taken HMRC's IR35 business entity test and is 'low risk'. Most contractors will be high or medium risk on the test even if they fall outside IR35.
- He has had a professional IR35 review which shows him or her to be outside IR35. For PayStream's customers these reviews are part of the service and there is no additional charge.
Those working through offshore schemes will be forced to move. It is worth noting that in his Budget the Chancellor announced that he is investing £1bn in HMRC to tackle tax avoidance and made it clear that HMRC will focus its efforts on 'Offshore Intermediaries'. It is probably the right time for contractors using such schemes to look for alternative solutions before they end up on HMRC's radar.
Q. Will this impact the public sector?
We have spoken to IT contractors that have been asked to move to a PAYE solution, for example by BIS, who have said that they will look for another contract in the private sector rather than take a pay cut. Others have asked for a rate increase to compensate for a drop in take home pay. Either way it is not good news for officials in the public sector tasked with delivering projects since they will be faced with either an increased cost or a loss of labour.