Firstly, the travel and subsistence tax relief changes announced in December, as discussed in our previous blog, will go ahead on 6 April. At the time of drafting this post, we have not seen the final wording of the legislation, but no material change from the draft published on 9 December 2015 is expected. That is the first blow to the flexible labour market.
Secondly, proposals were announced yesterday which, if implemented in April 2017 as planned, will see a huge shift in the tax arrangements for contractors engaged through their own limited company (PSCs) if they carry out work for public sector bodies.
Who is liable to make tax deductions?
Under the proposals the public sector body which engages the PSC will be responsible for assessing whether the contractor would be an employee if engaged directly rather than through the PSC. This is a variation on existing IR35 legislation, under which the burden is on the PSC itself to make the assessment and account for income tax and national insurance contributions accordingly.
If there are agencies and/or other intermediaries in the contractual chain, the party which contracts with the PSC will be required to make the assessment and account for the tax and national insurance.
What counts as a public sector engagement?
The proposals list the following:
- Government departments
- Legislative bodies
- Armed forces
- Local Government
- Schools and further and higher education institutions
- Other public bodies (listed in a Schedule including bodies such as The British Museum, BBC, Channel 4)
- Publically owned companies such as Transport for London
How will the public sector body or intermediary assess the engagement?
Simplified guidance from the HMRC has been promised along with a digital tool to provide a real time HMRC opinion.
There will be public consultation and engagement with interested parties to develop the guidance and online tool.
How will the amount of tax be calculated?
The public sector body/intermediary will need to calculate an amount of deemed employment income.
It is proposed that it should be based on the amount of the payment made to the intermediary, less any VAT charged. It will also include a 5% deduction, reflecting the existing 5% deduction rules that apply to personal service companies.
The balance is then to be included for Real Time Information purposes and returned to HMRC in the normal way. The public sector body/intermediary should operate all expenses and other allowable deductions and allowances as if this were a normal direct employment. Responsibility for paying employer NICs on the deemed employment income will also shift from the PSC.
An example given in the Budget papers shows how this exercise looks in practice:
Grace works through her own PSC – the company “invoices the Ministry monthly for £2400, which includes £400 VAT. The Ministry treats £2000 as Grace’s earnings and deducts £223 tax and £159 employee NICs, which it pays to HMRC via RTI with £183 employer NICs. The Ministry pays Grace’s company £1618.”
This and other examples given deliberately do not deduct the 5% just to make the examples easier to follow, but in reality there would be the 5% deduction applied in addition to deducting the VAT.
Will this mean the contractor will be charged twice for tax?
No as tax has been deducted the contractor will receive a credit against employment and dividend income drawn out of the personal service company so there should not be a second charge to tax.
The corporation tax liabilities of the PSC will remain unchanged by the measure.
Presumably the contractor’s remedy, if disagreeing with the assessment, will be by seeking a rebate in tax returns rather than at the point the assessment is made.
What about engagements in the private sector
There is no proposed change in rules for any engagement in the private sector. It will be for the PSC to account for tax to the HMRC.
Is it a good idea?
The Government sees this proposal as a means of attacking false self-employment on the basis that public sector bodies/intermediaries will be risk averse when the primary obligation falls on them, so, if in any doubt, will pay the tax. Once HMRC has received the tax payment, then it becomes harder for contractors to claw it back.
The changes to travel and subsistence tax relief has attracted lots of comment from recruitment sector trade bodies concerned that it will lead to a skills shortage as contractors refuse to work away from home for lengthy periods for less money.
This new proposal will be viewed as a double whammy, and a further disincentive for contractors to engage with the public sector. This could create a two tier approach between public and private sector contracting, leading to a greater skills shortage in the public sector as contractors aim to keep the status quo by working for private end users.
This in turn, could drive up cost for the public sector organisations, as in order to attract quality contractors, they may have to pay higher rates. That is the last thing the Government needs as it continues to look for ways to cut public expenditure.