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PSC's in the Public Sector

Guidance issued on 3rd February 2017

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I have been reading the two guidance documents issued on 3rd February: Off-payroll working in the public sector:reform for fee-payers / Off-payroll working in the public sector: personal service companies.

Rather than provide clear answers I am afraid that these documents have just created even more questions in my head.

The Reform for Fee-Payers document states that tax should be deducted from payments at BR together with employee NI. Employer's NI is payable by the fee payer and not the contractor, which appears to be a divergence from the IR35 rules which apply to PSC's working for the private sector where all the tax and both lots of NI fall on the contractor.

The guidance for personal service companies states that the individual can pay him/herself the net amount received "through your payroll without Income Tax and NICs" OR "You can pay yourself a tax-free dividend up to the total of the net fee received from contracts in the public sector, where Income Tax and NICs have been deducted at source. You do not need to declare that dividend on your self-assessment return"

Maybe I am missing the point here but what about higher rate tax and the dividend tax? Do these not apply to individual's working through PSCs on public contracts? I can understand the reasoning behind the dividend tax not applying (although it is just another complication to an already overly complicated system) but the higher rate tax bit doesn't make any sense. From the guidance wording, if all the net proceeds are withdrawn by dividend, no more tax is payable.

For the PSC, the net amount received from the payer is treated as a deduction for CT so it would appear logical that the fee payer would only deduct basic rate tax as noted in the guidance because to deduct tax at 40% would reduce the net amount received and therefore increase the profits for CT which would increase the tax cost significantly.

This guidance appears to side step a lot of the basic principles of cumulative earnings and higher rate tax. Is this guidance designed to be misleading for a purpose or does it indicate a change of mindset? Will these rules be extended to PSC's operating in the private sector?

Has anyone else read this guidance?

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By Ruddles
14th Feb 2017 10:23

Yes, I've read it and it's a load of b*llocks.

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14th Feb 2017 15:47

Much of the guidance follows the draft legislation, but some of it is just wrong and is about to be rewritten, along with some of the draft legislation.

If the PSC works solely for a public sector client, and the new Chapter 10 rules apply (they're not exactly the same as IR35), the PSC's income will all have been taxed as the deemed income of the director and only the net-of-PAYE-and-NICs amount (and any VAT) will have been paid over. The PSC can then pay it over to the director without further tax or NIC, and it needn't even go through payroll (as far as HMRC is concerned, it's already been treated as the director's income).

The provisions on CT relief for the deemed payment look wrong: the draft legislation and recent guidance state that CT relief will be due for the net deemed payment. This would mean leaving the PAYE and NIC deduction in charge as taxable profit in the PSC, with CT to pay, out of money that has never been received.

The student loan and statutory payment guidance also looks wrong. The public sector body or agent should be responsible if you follow the relevant existing regulations through, but the guidance tells us the PSC is responsible, even though it will not be putting anything through payroll.

The recently published draft NIC regulations are not exactly the same as the draft tax legislation, so it must be presumed that changes are already being made to what we will see on Budget Day on 8 March.

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By Mallock
14th Feb 2017 17:06

It beggars belief that HMRC can upload guidance which is patently incorrect a mere 9 days ago for something which comes in to force in under 7 weeks. Why bother? Tax policy by brail?

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14th Feb 2017 19:36

Read it today and thought it was rubbish.

What about the following:

1) corp tax relief on the tax and NIC paid by the company. I would envisage this to be in line with CIS, in that a tax credit should be given.

2) assuming only one contract, no other income, what about personal allowances for tax and NIC. Is HMRC saying the individual is not entilted to this.

3) what about other genuine company expenses? Why not at least allow a for these. If all of the income is being taxed at source, then how is this expenditure being taken into account for tax relief. Once again a tax credit system, similar to the CIS scheme would work, and apply the calculations of IR 35 to the corporation tax.

Unless I have misread the guidance.

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By Ruddles
to Jekyll and Hyde
14th Feb 2017 21:13

Jekyll and Hyde wrote:

what about other genuine company expenses? Why not at least allow a for these. If all of the income is being taxed at source, then how is this expenditure being taken into account for tax relief.

Perhaps that's the thinking behind excluding only the net amount from the CT calculation - to leave some taxable income against which the expenses can be set. So HMRC can claim that the expenditure is relieved. That, of course, is also b*llocks.

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By Lass
16th Feb 2017 12:27

Also read the guidelines and found them confusing.I couldn't even agree the tax and NI deducted from the example if BR is to be used?

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20th Feb 2017 17:19

I haven't been able to agree the statutory deductions in the example either and using the net payment to reduce the taxable profits doesn't work for basic double-entry book-keeping. How do you account for the deductions made, you can't keep showing the underpayment as a debtor.
Some agencies are saying they'll be using a D0 tax code, so no personal allowance either and does HMRC truly believe that they're going to pick up the employer's cost?
As has been said earlier, we will have to wait for the Budget.

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18th Apr 2017 13:18

Has anybody in the last couple of months seen any updated draft legislation/guidance on extraction of cash from a PSC please?

Do we know yet what is envisaged?

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