Off-payroll tax changes impacting the public sector

02 August 2016

From April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working in the public sector. The government believes public sector bodies have a duty to ensure that the people working for them are paying the right tax.

This is a fundamental change to the tax legislation, which interestingly only impacts the public sector.

The changes will affect engagements with contractors who provide their services to the public body through a personal service company and also engagements with agencies/managed services providers whose contractors all provide their services through a personal service company.

Current position

Where a contractor provides their services to a public body through their own limited company, either directly or through an agency, all payments may be made gross and the onus is on the limited company/agency to determine the correct tax and national insurance treatment. Engaging contractors through Personal Service Companies has often been seen as a good way for public bodies to engage scarce or key resources, outside of the restraints of pay scales and recruitment freezes, with little risk of tax exposure for the public body.

From April 2017

It will be the public body that needs to determine whether to subject any payment, made either directly to a contractor working through their personal service company or indirectly through an agency, to PAYE and NICs, and if appropriate withhold and remit the PAYE and NIC to HMRC.

Where an agency provides workers to the public body who provide their services through a limited company, the obligation to determine whether income tax and NICs are due lies with the agency, and if appropriate the agency is required to withhold and remit the PAYE and NIC to HMRC.

The public body, however, needs to be satisfied that the agency is fully complying with the rules. There is still a lot of consultation on this point, with agencies pushing back saying that they are not best placed to make this determination.

What will be the impact on the public body?

All NHS bodies will likely find substantial increases in the cost of engaging contractors. This could be a combination of Employer’s National Insurance costs as well as additional daily/hourly rates being sought by workers/agencies.

In addition, these changes create a significant amount of responsibility on the NHS organisation and considerable risk if they get it wrong.

What do NHS bodies need to do?

As a minimum, all NHS bodies will need to update policies, processes, contracts and Accounts Payable and payroll systems to reflect the changes to comply with the new rules by April 2017.

To ensure that there is robust compliance, we recommend that the NHS body undertakes a snapshot analysis of who you currently engage on this basis (this would include any managed service arrangements you may have in place) and determine the potential increase in costs of engaging contractors and the impact on budgets for 2017/18.

To ensure that the organisation effectively manages compliance around this issue, we recommend a steering group is formed to address the financial as well as governance issues. With key actions allocated to members to ensure:

  • impact on the budget is correctly determined and reflected in the 2017/18 planning;
  • a robust policy is in place for HR, finance and payroll to follow;
  • a robust process is introduced to ensure all engagements are correctly considered and engagement and payment decisions are correctly documented and processed for PAYE, NIC and VAT;
  • staff are trained to ensure that they can correctly comply with the new rules;
  • contracts are issued to correctly reflect each engagement; and
  • appropriate assurances are obtained from all agencies, managed service providers and consultancies providing workers who provide their services through limited companies.