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Off payroll working in the public sector

From April 2017, the public sector will have to review the employment status of every limited company that works for it.

The public sector includes:

  • GP practices
  • Dental practices
  • Opticians
  • Pharmacies
  • OOH providers
  • CCGs

Who may this affect?

Anyone who provides services for the public sector through their own limited company (this is known as a personal service company or PSC). This change only applies to PSCs and not to sole traders or partnerships.

What is changing?

The responsibility for PAYE and NIC liabilities will lie with the engaging party and not with the PSC providing the worker. This is a big change as it means that the engager, not the owner of the PSC, will have the responsibility to decide if the PSC falls into the rules.

If the engager decides the PSC is within the rules and should be treated as an “employee”, they will have to deduct PAYE and NIC before making any payments to the PSC. The worker would not be transferred to the actual payroll under these rules, as it is just a deemed employment calculation.

If someone is treated as employed for tax purposes, they might want to go on the payroll properly to get the benefits of sick pay, holiday pay, etc. Otherwise deemed employment would be the worst of both worlds – PAYE and NIC without the accompanying employee protections.

How will this be done?

HMRC have developed a new digital tool to replace the Employment Status Indicator (ESI) for the public sector, called the Employment Status Service (ESS). Public sector engagers can use the ESS to decide if they should apply PAYE and NIC. While it is an optional service, HMRC are likely to place a lot of reliance on it and may take more convincing about the status of an engagement if the ESS has not been used. HMRC have said they will stand by the end result, provided it has not been achieved through contrived arrangements.

Depending on the answers the new ESS gives in particular circumstances, it may not be appropriate to run certain contracts through a PSC after April. The engager will need to decide if it would be better (if PAYE and NIC are going to be withheld anyway) to make the worker an actual employee for certain projects.

If the result is that “the engagement should be classed as employed for tax purposes”, the engager will need to deduct PAYE and NIC before making a payment to the PSC. The detail is still lacking on what rate of tax will be deducted, but the Revenue’s examples seem to assume a standard cumulative tax code will be applied. The engager will need to pay over the PAYE and NIC to HMRC and report the figures through its PAYE reporting processes. There is no requirement for the worker to be given a payslip, but they will be given a P60. The worker will also not be required to be auto-enrolled into a pension scheme.

Considerations when changing status

Some individuals may be thinking of going back to being a sole trader rather than working through their PSC, as the new legislations only affects PSCs, although this may be a short term solution. Even in the case of sole traders, if HMRC successfully argue that someone who is working on a self-employed basis is an employee, it is still the engager who unfortunately will have to pay over the PAYE and NIC (which is no different to the new PSC rules). Therefore, it may only be a matter of time before engagers change the way they deal with sole traders/partnerships as well as PSCs.

Where income has been subject to PAYE and NIC, the worker can take it out of the PSC as a salary, without having to operate any further PAYE. Again, the detail is lacking in this area and it is not clear whether this is the required treatment or whether it may still be possible to draw this income in the form of dividends, if, for example, a family member holds the shares. Nor is it clear what happens if some of the income is retained in the PSC (to stop it being loss making). There is no equivalent 5% deduction as there is under the IR35 rules.

A way forward

The new PSC/public sector rules are a complex set of changes. Engagers could misunderstand or “run scared” from the new legislation and decide the safest thing for them to do is to apply PAYE and NIC at source, even when that may not be the correct approach. There is currently no way for a worker or their PSC to appeal a decision made by an engager.

A way forward could be, or perhaps, should be, to instigate a two way conversation between the PSC and the engager to gain a proper understanding of the new ESS tool and the end result, ensuring a copy is printed and retained by both parties. Easier said than done, perhaps, but it would be far better to satisfy both sides that the correct treatment will be applied for the arrangement rather than just “running scared”.

It remains to be seen whether, where engagers are required to treat the worker as an employee, workers may decide to contract with engagers directly as an employee, as this is likely to be considerably more efficient than continuing to route the funds through the PSC and applying these new rules.

Oliver Pool, Partner, Veale Wasbrough Vizards LLP

Healthcare Group, April 2017