Off-payroll workers – New Public Sector tax obligations

HMRC recently issued practical guidance for public sector bodies which covers several obligations imposed on these bodies, when engaging workers or consultants through so-called personal service companies or partnerships (PSCs). The bodies covered by the guidance include local authorities, universities, the NHS and others, and their intermediaries.

In order to aid Government targets to reduce the tax gap arising from off-payroll working arrangements, an obligation has been imposed on public bodies to treat payments to PSCs as deemed payments of employment income, with effect from April 6 2017.

Public Sector Worker Tax Personal Service Company Law Employment Scotland

The consequence of this, in practical terms, is that public sector bodies and their intermediaries will need to decide whether to set up a separate payroll for deemed employees. From April 2017 it will be the responsibility of the public sector body to decide whether someone performing 'off-payroll' work for their organisation is covered by this tax legislation.

Change to the status quo

At the moment, the responsibility remains with the relevant worker to account for any tax due on payment received. After April 6 2017, that responsibility will shift. It will effectively be up to the public body to guarantee that the employment status test is properly applied to each off-payroll worker and if they are not genuinely self-employed to deduct tax and NICs at source.

Where, in the absence of the PSC, the worker would have been regarded as an employee of the public sector authority then the public sector body or the agency will be required to treat payments made to the PSC as if they were earnings paid to the worker from employment with the public body.

A worker working through a PSC or other intermediary has the responsibility of providing the fee-payer with the information they need to help determine whether the off-payroll rules should apply. They also have to provide the information needed to allow the fee-payer to deduct tax and NICs from the payment they make to the worker. In addition, they have responsibility for reporting to HMRC on their own and the company’s tax affairs. Furthermore, where PSCs are supplied via agencies it will still fall to the public sector body to determine whether an employment relationship would have existed with the worker but for the PSC.

There are two notable exceptions to which these rules do not apply, (1) workers who are subject to PAYE and NIC as employees of an agency or umbrella company; and (2) workers supplied by compliant managed service companies.

To whom does this apply?

The above guidance concerns all public sector organisations as defined by the Freedom of Information (Scotland) Act 2002.

When does this apply?

The reform applies to payments made on or after 6 April 2017, including payments made for contracts entered into before that date. Where work is completed before 6 April 2017 but the payment is made on or after 6 April 2017, the rules will still apply.

Next steps – determining employment status

It is advisable that public sector organisations implement clear, documented systems for assessing off-payroll worker status and identify any existing workers who will need to be assessed, including those supplied through agencies.

Crucial to determining whether the new off-payroll working rules apply to certain contracts will be an assessment of the employment status of the off-payroll worker.

You may be aware of the series of different tests involved in employment status. It is an area of employment law which is increasingly complex with many delicate moving parts. To aid this, the Government has developed the Employment Status Service which is an online tool.

Get in touch

If you require expert assistance with such matters the please do not hesitate to get in touch with our Employment Team.