The draft Finance Bill 2017 sets out the proposed new rules that will apply to public sector bodies hiring off-payroll workers through personal service intermediaries (‘personal service companies’ or ‘PSCs’). These changes could significantly alter the costs of engaging such workers for public sector bodies. This note summarises those changes and focusses on what practical steps should be taken to prepare for the changes.
What is changing?
From 6 April 2017, where a public sector body engages an off-payroll worker through the worker’s own PSC, that body will become responsible for:
- determining whether the new rules apply by identifying and reviewing the employment status of the worker engaged through the PSC including one provided via an agency;
- if the rules apply, the fee payer, being either the public sector body itself or the recruiting agency if the public sector engages through one, will need to deduct tax and NIC (both employee’s and employer’s) from any payments made to the PSC. This applies to payments made on or after 6 April 2017, even if the contract is entered into or the work is completed before this date.
Who will the changes affect?
The changes affect all public authorities (as defined by Freedom of Information Act 2000 s.3 and Freedom of Information (Scotland) Act 2002 s.3, for Scottish public authorities) agencies, third parties supplying workers to the public sector and the workers themselves.
It is the public sector body that must determine whether the new rules apply to any given arrangement. In addition, there are obligations for public sector bodies to notify any agency involved if the rules apply to the contract it has with the PSC.
Where a public sector body does not reply within 31 days to a written request from an agency as to whether or not the new rules apply, it is the public sector body that must then account for PAYE/NIC as if it were paying the fee to the PSC, even where that is not the case.
How can you prepare?
With only a few weeks left before the change comes into force, it is important you prepare now for these changes. There are practical steps that you should consider:
- How will you determine whether a worker is employed or self-employed? HMRC have released an online Employment Status Service tool to help fee payers determine whether any current or prospective employees fall within the new rules. The service is optional and was released on 2 March 2017 (www.tax.service.gov.uk/checkemployment-status-for-tax/setup).
- New processes may need to be built in to the take-on procedures for externally supplied workers to manage the risk. A review of current practices ought to be undertaken.
- Review and, where necessary amend systems, including checklists (for example, employee starter checklists for payroll purposes), process maps, internal guidance, contracts and policies to demonstrate a clear audit trail for presentation to HMRC in the event of a review.
- Consider setting up a separate payroll for these workers. You should ensure the worker is not auto-enrolled for pension purposes or set up for statutory payments.
- Consider draft communication material to be issued to PSCs and agencies supplying this kind of worker outlining the new rules.
- Understand what the cost implications are of doing nothing and paying via payroll. In particular, is it appropriate or cost effective to be engaging with PSCs from April onwards or can the services being provided be done by existing/new employees? If the choice is made to pay via payroll:
- The fee payer will have to pay employer’s NIC at 13.8% on the net amount of the invoice, which is likely to push costs up.
- Deemed workers will inflate the Apprenticeship Levy costs for the fee payer.
How can we help?
We can assist you with all aspects of the new rules; helping you to understand the changes that your organisation needs to implement to be compliant with the new rules, training you on what constitutes employment and self-employment, preparing a costing review of how the new rules will impact your business, reviewing contractual arrangements in place and providing guidance on what HMRC will look for in a review.
For further information, please contact Inez Anderson on 020 7131 4919 Paul Tucker on 0117 376 2129.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.