On 18 May 2018, the government published a consultation paper on off-payroll working in the private sector. This follows last year's reforms to the off-payroll tax rules in the public sector - which the government thinks are working well. The consultation paper could lead to the extension of the rules to the private sector and so it makes sense to understand how the public sector rules currently operate. This briefing seeks to do that. When we know the outcome of the present consultation, we will publish an updated note.


Legislation was introduced in 2000 attacking arrangements for individuals to claim the tax advantages of self-employment by providing their services through a personal service company - a PSC.

It was one thing if the services were genuinely provided by the individual on behalf of the PSC to a disparate group of customers, each for a limited period. It was another when there was just one customer, the arrangement continued for many years and the relationship between the individual and the organisation was employer/employee in all but name.

That legislation was directed at the PSC and not the organisation. The individual was deemed to have received a salary from their PSC equivalent to the payment made by the organisation to the PSC and PAYE/NICs could then be collected from the PSC on the deemed salary. The organisation itself could still make their payment gross to the PSC and did not have to account for employers' NICs.

New rules for public sector organisations

From April 2017, responsibility has been shifted to public sector organisation to collect PAYE/NICs and account for employers' NICs if the organisation receives services from individuals through PSCs. Payments are caught if they made after April regardless of when the services were actually provided.

Public Authority

A public authority is an organisation that falls under the ambit of the Freedom of Information Act 2000 and Freedom of Information Act (Scotland) 2002. This includes government departments, legislative bodies, the armed forces, local government, the National Health Service, schools, the police and the BBC.

When are services caught?

The new rules apply to "engagements" involving the individual providing their services to public authorities through intermediaries in which the worker has an interest.

In more detail, the rules apply if:

  • the individual personally performs services for a public authority;

  • the services are not provided under a contract directly between the public authority and the individual;

  • the services are instead provided under arrangements involving an intermediary; and

  • the circumstances are that:

    • if the services were provided under a contract directly between the client and the public authority, the individual would be regarded as the public authority's employee or office holder; or

    • the individual would be an office holder who holds office under the public authority and the services relate to the office.

In practice, the intermediary will often be a limited company but it could also be a partnership or unincorporated association.

What level of interest in the intermediary is required?

If the intermediary is a company, the rules only apply if the individual has a 5% interest in the company and the company is not related to the public authority.

If the intermediary is a partnership, the rules only apply if the individual is a partner and one of the following three conditions is met:

  • the individual is entitled to 60% or more of the partnership profits

  • most of the profits of the partnership derive from the engagements with which these rules are concerned

  • the profits of the individual partner are based on the income generated from the engagements with which these rules are concerned

What is the effect if the new rules apply?

When the rules apply, the individual is treated as receiving employment income and PAYE has to be applied. The amount of the employment income is the amount paid by the public authority less VAT and less the direct cost of materials. Expenses met by the intermediary that the individual could have deducted if the individual had been directly employed by the public authority can be deducted when making the payment. The intermediary can disregard the amount it received when computing its trading profits.

Payments through chains of persons

In practice, there may be organisations between the public authority and the intermediary so that, in effect, there is a chain of payments from the public authority down to the intermediary. In this case, it is not the public authority that is treated as making the payment of employment income but whoever is immediately above the intermediary in the chain. It is that person who has to operate PAYE. If that person is not based in the UK, it is the first person above them who is based in the UK who has to do so.

Notification and Information

Before a public authority enters into an engagement that could potentially be caught, it must inform the individual whether or not it has concluded that the engagement is actually caught. The individual can require the public authority to gives its reasons for reaching its conclusion. If the intermediary is a company or partnership, the public authority must assume that the individual has the required level of interest to be caught unless the individual satisfies the public authority that that is not the case.