Osborne targets public sector PSC contracting
Personal service companies contracting in the public sector have been targeted by George Osborne in Budget 2016, delivered earlier today (March 16th).
Rather than just being able to accept the assurances of their PSCs about tax and IR35, as they do now, the Budget says that state engagers face a new “duty” to ensure all PSCs they use pay enough tax.
The government suspects that by being paid as a company with corporation tax at 20% rather than as a person, for whom tax is typically at 40%, PSCs get away with paying HMRC some £400million less.
The chancellor said: “Public sector organisations will have a new duty to ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies.”
'New duty' on public sector PSC engagers
Whether this ‘new duty’ means that all PSC contractors in the public sector will be put on their engagers' payroll and taxed at source - the same as permies are, is not specified in the Red Book.
But at chapter 2.40, the Treasury says the new duty will apply from April 2017 following consultation on a “clearer and simpler set of tests and online tools.” Private sector PSCs will not be affected.
To Martyn Valentine, founder of status advisory The Law Place, the government’s wording indicates that one-person companies won’t automatically be put on their engagers' payroll.
“We all remember the abortive Business Entity Tests,” he said, referring to a set of HMRC tests that were part of the current assurance process for public sector PSCs until they were axed for being unhelpful and misinterpreted.
He also told ContractorUK: “Clearly, public sector bodies will be reluctant to certify that an engagement constitutes self-employment if there is a risk of future tax liability and penalties.”
According to a technical note released by HMRC alongside the Budget, a new digital tool will be developed that will make the “decision on whether or not the [IR35] rules should apply as simple as possible and provide certainty.”
Andy Vessey, status consultant at IR35 advisory Qdos, says the government is likely to borrow from a piece of work which it has already begun.
He told ContractorUK: “As HMRC are currently developing the ESI tool for IR35, then this will be used by the public sector, maybe using a narrower set of rules to decide on employment status.
“This would be easy for public sector bodies to use, understand and produce a decision that could be relied upon, as far as they are concerned.”
Such bodies will have to determine the PSC contractor’s IR35 status and be responsible for deducting income tax and employees’ NI, in the event that the contract is directly with them.
NICs 'twist going to cause all sorts of issues'
But where the contract is via an agency or third party, it will be the party closest to (paying) the PSC who will be responsible for deducting income tax and employees NI. This party must also account for this via RTI.
“What appears to be a twist is that the payer to the PSC has to meet the employers’ NI cost,” said Duncan Strike of Intouch Accounting, reflecting to ContractorUK on the HMRC technical note.
He added: “This does not appear to be a cost to the PSC any more, as in other IR35 cases. This new aspect is going to cause all sorts of issues regarding the contract value.”
Roger Sinclair, legal consultant at egos, reflected: "On the face of it [this is good for PSCs]...it's better than being subject to IR35, where the PSC pays both.
"Has this not been thought through? If it has, it smacks of a 'dry run' for the implementation of similar changes...later."
'Supervision, Direction or Control'
According to HMRC, it will be for “cases that are less clear cut” where its IR35-specific IR35 tool will come in, so it can provide a “real-time HMRC view on whether or not the intermediaries rules need to be applied,” the note adds.
But on the basis that it is not mentioned (in either the Budget or the HMRC technical note), the tool will not be programmed to test for Supervision, Direction or Control, as some have expected.
“No reference has been made to SDC,” reflected Mr Strike. “[And] the proposals are insufficient to consider what appeals process will exist, or how this is going to be used as a model for a wider IR35 consultation.”
However, the proposals do consider “complex contractual chains” such as where they are multiple agencies or when the agency is offshore.
In these circumstances, the so-called ‘non-direct’ guidance will apply—that is, it will be the party closest to the PSC who is responsible.
The HMRC technical note also provides some case studies – as it did alongside the BETs (the case studies were axed too), which illustrate not only who must apply the rules – such as a recruitment agency potentially, but also when they will not apply.
The example given is Tanya, a graphic design artist who upon being engaged by a local council passes all the questions posed by HMRC’s online tool, which will be designed to test if the contract would have been one of employment if the contract was direct.
In this ‘outside’ example, and in the other two examples HMRC provides, the 5% expenses rule on IR35 is not factored in for “simplicity’s sake,” although this will form part of the consultation, due to run “before the summer.”
'Serious impact on contracting'
“[Although] further details are needed,” reflected Mr Valentine, “this measure is likely to have a serious impact on the entire contracting industry.
“It’s a significant change and signals HM Revenue & Customs' frustration in enforcing tax bills against personal service companies…[although] this measure will not affect contractors working in the private sector.
“Indeed, [they] can operate outside IR35 if an engagement in question genuinely constitutes self-employment…[but for public PSCs] it is imperative that the new rules distinguish between representatives of personal service companies where the work is duplicated by an employee of the public sector body and personal service companies engaged to deliver a discrete project which is not part of the public sector body's day to day services. The latter approach would reflect existing case law and treat personal service companies fairly.”
Editor’s Note: Further reporting and analysis of Budget 2016 will follow on ContractorUK tomorrow morning.