The draft legislation published in the 2017 draft Finance Bill confirmed, as announced in the Autumn Statement, that from 6 April 2017 PSCs supplying into the public sector, either directly or through a recruitment agency, will be treated differently to PSCs in the private sector.
The new legislation makes it the responsibility of the public sector (or agency paying the PSC) to decide whether a worker is caught by IR35. In the private sector it is still the worker that is expected to make the decision. Under the new rules employed levels of PAYE and NIC will be deducted and paid to HMRC prior to any payments made to the PSC if the public sector or agency believes that the worker may be caught by IR35.
The Government says that the legislation is designed to capture workers who use PSCs to provide services to the public sector and avoid paying the full amount of employment tax and NICs that would be payable if the PSC worker was an employee.
Who is affected?
All parties in the supply chain namely:
- The Public Authority - will be required to confirm to an agency or PSC with which it engages whether the role advertised is inside IR35. The specific question that Public Authorities have been asked to consider is "would you have taken this person on as an employee or a self-employed supplier if you had hired him/her directly?" HMRC has created an online tool (still in development) to help the Public Authority to make the decision. HMRC estimates that 90% of workers will be caught and the online tool when finalised will no doubt produce this result. Public Authorities must calculate, deduct and remit PAYE and NIC deductions to HMRC where the worker is caught.
- A Recruitment Agency - if paying a PSC will be under the same obligation as the Public Authority including the responsibility to deduct tax. The real difference is that the agency should have an opinion from the Public Authority about the status of the role. It will be very difficult for an agency to challenge this since HMRC will be able to point to the Public Authority opinion.
- The PSC - In situations where the Public Authority or agency believe that the role is "caught" it will only receive the net of tax amount. This may cause cash flow issues where there are outstanding bills. There will also be complications in calculating liabilities that the PSCs accountants will have to deal with.
- The Worker - will need to provide personal details to the Public Authority (or agency) including their National Insurance number, date of birth and personal address, and P45 from previous employments. Currently only the PSC details are required for payment to be made. Net pay is likely to go down by 10-15%.
What is likely to happen next?
Public Authorities will:
- Put in place new IT systems to calculate and make tax deductions - this may take some time and they may seek help from agencies in the meantime;
- review all the roles that are outsourced. It is likely that most of these will be viewed as caught by the new rules. Social workers, teachers, nurses and doctors will undoubtedly be affected.
Recruitment Agencies will:
- Review contracts with Public Authorities since they will not have taken into account the extra tax that will be payable, in particular Employers NI and Apprentice levy;
- speak to workers in the public sector about the impending changes;
- assess the risk of working with PSCs outside IR35.
- Consider whether it is still financially viable to work through a PSC. For some an umbrella might be more attractive as less hassle plus, the additional benefits of building up continuous employment and rewards schemes.
- Consider whether an IR35 review may help its position. This will depend upon whether the Public Authority/agency is willing to take the review into account (and the result of the review). PayStream's IR35 team can help here.
- Consider whether to close down their PSC. Where a Public Authority states that the role is inside IR35 there is a concern that HMRC would then look at previous years and seek to raise an assessment.
PayStream is working with its agency partners to ensure that a compliant solution is available for all workers.
For more information please contact our Sales Director, Ashley Olliver on 07800 591 213 or via email at Ashley.Olliver@PayStream.co.uk