The ICAEW have published Tax Representation 15/17 ‘Workers’ Services provided to public sector through intermediaries’. It highlights a number of concerns with the proposed changes for Personal Service Companies (PSCs) working in the public sector, and suggests that they be postponed until 2018.
Under draft legislation published in Finance Bill 2017, from 6 April 2017 where a worker provides services via a PSC to a public sector body:
- Responsibility for deciding whether the IR35/off-payroll worker rules apply will move from the PSC to the public sector body, and
- The public authority or agency that pays the PSC (the ‘feepayer’) will be responsible for deducting and paying over employment taxes and NICs to HMRC.
- See PSCs: proposed changes
The ICAEW are concerned that the current draft legislation:
- Introduces complicated, retrospective measures: would it not be better to simply align the NIC rates for employees and the self-employed?
- Will increase costs in the public sector: government departments are already advising consultants to increase their rates by 20% to avoid losing them to the private sector.
- Won’t work in practice and is based on faulty assumptions.
- Has too early a commencement date: it will start to apply before receiving Royal Assent and before HMRC’s final guidance is available.
They therefore recommend that:
- HMRC publish a detailed policy objective so that consideration can be given as to whether the draft legislation is the best method of achieving this.
- The commencement date should be put back to April 2018.
- Failing that, by February 2017 HMRC need to have in place:
- Final draft legislation for tax and NICs addressing current uncertainties.
- Easy to understand guidance.
- Technically proficient and responsive telephone support, and
- An employment status indicator tool that has been thoroughly tested.
Looking at specific aspects of the draft legislation the ICAEW recommend that:
- HMRC reconsider the liability of public sector bodies that get it wrong: currently the fee payer (which may be an agency) is liable to deduct income tax and NICs, even if the public sector body makes the wrong decision.
- It should be compulsory for information to be passed down any chain of intermediaries and to the worker, without having to ask for it.
- More onerous sanctions for failure to reply, providing wrong information etc. be considered.
- HMRC clarify how the fee payer will receive a deduction for the deemed payment and employer’s NICs paid: this isn’t clear from the draft legislation.
- The legislation needs to provide for a deduction in the PSC for the tax and NICs deducted from the payments it receives.
- The worker should be able to give notice to the fee payer to reduce the deemed payment for pension payments or capital allowances.
- The PSC should be exempted from requirements on statutory pay, student loan repayments and auto-enrolment: these should sit with the fee payer instead.
- The VAT position be clarified: are tax and NICs to be calculated on the VAT exclusive amounts, and are the PSC’s services really a taxable supply since it will receive no consideration?
- The amount of deemed earnings be reduced for reimbursement of any expenses that would have been deductible or exempt if paid to an employee of the public sector body: currently it appears that these would be added to the contract costs and subject to tax and NICs.
- An up to date list of public authorities should be published online. It would be helpful if this also included details of who to ask at the public authority for their conclusion on whether the rules apply.
Comment
HMRC's guidance on the new rules, is misleading and certainly not the comprehensive guidance promised following the original consultatino. For example it says that ‘The off-payroll working legislation will allow for your company to receive a deduction up to the full amount of the deemed direct payment (DDP) so you won’t be taxed twice.’ However, its example and the draft legislation say that the company only receives a deduction for the net amount of the DDP.
The net DDP received can be paid out tax free as a dividend or as a salary. As accountants are now realising there are two issues:
a) the PSC may have expenses to offset against the DDP and so it will be illegal to pay out the net DDP as a dividend under Company Law: it will not equal distributable reserves.
b) PAYE software will require adjustments if the amount paid out is not truly salary. If not salary, what is the nature of the payment?
see our worked examples in Personal service companies & tax
Links
The ICAEW's Tax Representation can be found here
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