Not on your payroll, not your problem? New public sector tax rules mean you need to think again
06 February 2017
From 6 April 2017, new provisions come into force relating to payments made to off-payroll workers via Personal Service Companies (PSCs), that might be used in the delivery of public sector projects (this includes all bodies covered by the Freedom of Information Act 2000). As PSCs are commonplace in the construction and engineering industry, all businesses with public sector contracts should be aware of the overriding impact, which could increase costs and compliance requirements.
It has become common practice over the last few years to engage workers on the basis of PSCs, as a way to mitigate the tax risks of directly engaging individuals as subcontractors. However, where arrangements with PSCs fall within the new legislation, the “fee payer” within the contractual chain (generally the entity paying the PSC, although not always) is required to treat payments to PSCs as earnings. As a result, they must withhold and pay to HMRC any amounts of tax and National Insurance Contributions (NIC) due as well as applying the apprenticeship levy. Commercially, this could significantly impact project margins and the ability to source the skills required for any given project.
There are exclusions to this, but guidance is still relatively undeveloped. So what could this look like in practice? Notes which accompanied the legislation suggest that where a contract is for “fully-contracted out services delivered in the public sector”, this legislation does not apply. However, conversations with HMRC to date have not provided clear principles. For now, detailed interpretation will be essential, with every situation carefully examined not only in terms of the contract but the substance of the arrangement with the public sector client.
Businesses who believe they may be impacted must start thinking about the substance of their contracts with both the public sector clients and also the PSCs who they engage, to allow for relevant planning and to ensure compliance with the new rules, if required. Fundamentally, there may also be a need to amend contracts, policies and procedures to ensure that the business is able to manage both the tax compliance and commercial impact of these changes. This could include issues such as:
- Who has what responsibilities within the contractual chain?
- Who will suffer the additional costs?
- Will indemnities be required in contracts?
- Is another structure more efficient?.
It’s also worth noting that the new legislation takes precedence over Construction Industry Scheme (CIS). This means that in practice, businesses with clients in both the private and public sector - using essentially the same PSCs for both - may be required to make payments under two different and distinct sets of rules. That could add considerable complexity and increase compliance risks, which if not dealt with correctly, could lead to increased penalties and interest if non-compliance is later identified.
We would recommend that functions such as Finance, Procurement and Tax fully understand the new rules that may apply and ensure that they are factored into any planning/decision making which might be required when delivering a public sector project and when thinking about the overall operations. It’s also important that commercial teams grasp the potential implications of using PSCs in this context, especially when considering the costs and contractual arrangements and detail. If engaged in contracts with the public sector, it is essential to make sure that the relevant information is made available to the right function at the right time.
With 6 April 2017 now looming, we would urge all companies in the sector who contract with public sector clients to consider taking the following key steps:
- Contract overview – could any be caught? How are they delivered?
- Review contracts – with public sectors and also PSCs
- Engage with public sector clients and PSCs – are they considering the impact of this legislation themselves?
- Consider updates to process, controls and policies to manage responsibilities and associated risks