Watch out, the tax cost for some of your contractors could very soon become your responsibility and the money at stake can rapidly escalate.
From 6 April 2017, a new regime will come into effect which we believe will significantly increase the cost and risk to public bodies engaging individuals through personal service companies.
At present (other than in very rare circumstances) if a public body engages a company which provides the services of an individual to the public body, the public body does not have to pay any tax through the PAYE system. That is for the company which has to ask itself if there was a contract between the public body and the worker would it be one of employment or self-employment. If employment, that company must operate PAYE.
From 6 April 2017, the public body in this situation will bear the risk of the PAYE. It will have to identify the correct position on that deemed relationship. Whilst being required to identify this is not new to some public bodies (e.g. NHS Trusts have been required by the DoH Chief Exec David Nicholson to test a percentage of long term engagements since August 2012), being responsible for the PAYE is new.
These rules have been introduced after the House of Lords select committee acknowledged the current rules are being ignored and so are not working. The new rules are only being introduced for the public sector at present.
What should public sector employers do?
All public bodies should ideally review all of their potentially affected contractors. A public body is any entity subject to the Freedom of Information Act (so includes NHS bodies, government departments, local authorities and many other entities carrying out public functions). An online tool was promised by HMRC for public bodies to use to assess their liability but none is yet available and no date has been announced for its release. We have seen an early "screen grab" version of the tool and noted to HMRC that no mention is made of the important test of mutuality of obligation. We have been told this is because HMRC assumes all contracts in the public sector have the requisite mutuality of obligation so testing it is a waste of time. We do not think that is legally correct.
The new rules increase the total cost to public bodies (principally but not just the employer's NIC of 13.8%) but does not disengage the VAT costs which for many public bodies is an irrecoverable 20% cost. Moving to employment can avoid that duality but brings pension costs, holiday pay, SSP and SMP into play.
How can we help?
We can help in any manner of ways, advising on the above, or helping renegotiating contracts. In practice, we feel the most effective solution is for an initial triage process be undertaken and we then critically assess a number of test workers. We would do this work for a fixed fee price.