Owner Kate Upcraft Consultancy Ltd
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Problems for agencies with public sector clients

16th Sep 2016
Owner Kate Upcraft Consultancy Ltd
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Kate Upcraft asks whether personal service companies and the agencies they work through are ready for the payroll changes due to apply from April 2017.

Cycle of change

In recent tax years there have been many changes to the intermediaries’ legislation designed to get more up-front tax and NI flowing into the government’s coffers. For example, quarterly reporting for employment intermediaries was introduced in April 2014, but penalties for incorrect quarterly reports only applied for the first time in August 2016. The changes due to apply from 6 April 2017 are arguably the most complex so far.

PSB burden

All public sector bodies (PSBs), and there are a lot more than you think, will have to assess if personal service companies (PSC) or partnerships that they are contracting with are within IR35. If those rules apply the contracted PSC or partnership will have to be included on the employee payroll for the calculation, deduction and payment over of tax and NICs.

This represents a significant shift of tax responsibility. Currently it is for the PSC or the partnership to determine if there is a deemed employment relationship with their client and whether for the income from the assignment needs to be treated as deemed salary subject to tax and Class 1 NIC.

Agency’s problem

If an agency supplies the PSC to the public sector body it will be the agency’s responsibility to manage the payroll obligation. Regardless of who ends up ‘holding the baby’ – the public sector body or agency - the challenges will be the same.

Scope of problem

Someone in the organisation has to take a view on whether the relationship falls within IR35, potentially using a new version of the employment status indicator (ESI) which hasn’t been designed yet. If the IR35 test is positive – in that it does apply, payment of the PSC’s invoice will have to involve both the accounts payable and payroll departments.

Payroll will have to deduct 5% from the invoiced fees (ensuring that materials are excluded) then set up the worker on the payroll to deduct tax and NI that will be paid over with the other employee related remittances to HMRC. The resultant amount due to the PSC then goes back to accounts payable for payment of the invoice and the handling of VAT.

Other practical issues

The practicalities of adding the PSC workers to the payroll simply to capture tax and NI will require software and operational changes. For example:

  • Who takes responsibility for assessing whether IR35 does apply to the contractors affected by the new rules?
  • Will your client (agency or public sector body) want to set up a separate PAYE scheme for these workers, or at least a separate payroll group to keep them distinct from other employees?
  • What additional employment rights will this bring into sharp relief for these individuals?

The workers that operate within the PSCs are most certainly workers for auto enrolment under current rules. This means they must be included in the assessment of the workforce and be auto enrolled if they qualify with employee contributions deducted from the invoice too and then refunded if they opt-out.

Current checks

Central government departments and the NHS are already subject to HM Treasury rules that require them to carry out tax compliance checks on highly paid and long-term contractors, but these changes will build on this framework. The full list of PSBS that will be included in the new regulations are (unless the final proposals change) those covered by the Freedom of Information Act 2000 and the Freedom of Information Act (Scotland) 2002. This includes doctors, dentists, pharmacies, housing associations, schools and universities as well as labour only providers.

Delivery worries

As the new rules are unlikely to be finalised until after the Autumn Statement on 23 November 2016, and a whole host of other significant changes coming on stream from 6 April 2017, the worry is whether software developers, public sector bodies, and employment agencies will be able to deliver what is needed to comply.

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By Tom 7000
19th Sep 2016 13:56

Expect to receive a letter from a Hospital asking to confirm that the client is compliant on your letter head whilst simultaneously supplying the name and policy no of your PII......

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By David Heaton
28th Sep 2016 14:15

An excellent summary of the forthcoming problems and impracticalities of the proposals. There are so many reasons why this will not work, even though it has been restricted for now to PSBs. The idea that PSBs, agencies and PSCs can adapt to new rules by next April, rewriting their systems appropriately when there is as yet no specification of what is required, is ludicrous, even if the PSB in question has payroll and AP in the same place. The IT changes cannot happen overnight.

To add another impracticality: HMRC has not yet said how its RTI system will handle the dual payroll record for each PSC worker, beyond promising that there will be no double taxation. The PSC worker will be on his/her own payroll and have a record on that reference under RTI. Each agency or PSB will also have to treat the worker as an employee and operate an emergency code, and depending on how the PSC works these could be numerous. The worker will therefore probably be shown as concurrently employed under several (or numerous, if P45s are not issued to those who may return) employer references, so the allocation of the code(s) will be a challenge. And let's not even start on the NIC position, given that earnings subject to NIC when paid by the PSB will be profit, to be paid out subject to NIC by the PSC. It's odds-on that nobody has even started to think about the rewrite of the NIC regulations to cope with the double charge, or the fact that each PSB will be given an employer secondary threshold in respect of the single actual employment in the PSC.

I'm not sure I agree on the AE pension, though. The worker is technically an employee only of the PSC. The IR35 changes don't affect employment or pension rights, and as a contractor employed by someone else, the worker can't be a 'worker' in AE terms for the PSB or agency. AE catches self-employed contractors who commit to personal service, but PSC directors are not self-employed.

I have to say my money is on deferral until April 2018, or notional introduction in April 2017 with no attempt to police before 2018. All the potential problems that stopped this approach being adopted with IR35's introduction in 2000 have to be addressed, and while IT can do a lot nowadays, it's not Harry Potter.

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By Digit Dabbler
14th Dec 2016 14:52

It's a long time since I calculated a deemed payment but I seem to remember pension and benefits were deducted as well as 5%. So if the PSC wants to support the government's pension initiative and make a £40k contribution to the employee's pension scheme it will reduce the actual deemed payment and the tax and ni due. If the agency or client are only going to deduct 5% before calculating tax and ni they will be working on a higher deemed payment figure so there will be an excess tax credit even if all available funds are paid out of the PSC as salary. Will we be able to adjust his tax code to absorb the excess?

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