New tax rules for individuals working via their own companies

What is a public sector organisation?

Public sector organisations include government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service.

Who will decide if the rules apply?

The public sector authority will decide. The authority needs to form an opinion as to whether, if the personal services of the individual were provided under a contract directly between the individual and themselves, the individual would be regarded as an employee of the authority. This is the same kind of employment status test based on case law that public bodies and agencies have to consider when they hire staff directly.

It is a matter of judgement whether the nature of and manner in which the services provided point to employment or self-employment. To ?assist the authority? HMRC has an Employment Status Service tool to ?help them make the decision?.

For reasons which are explained below, the public authority may be tempted to err on the side of employment particularly if the Employment Status Service tool indicates employment.

The link to the Employment Status Service tool is www.gov.uk/guidance/check-employment-status-for-tax.

Why have these rules been introduced?

The rules replicate many of the effects of the ?intermediaries? legislation enacted many years ago (often called the IR35 rules). This legislation requires, for example, a one person company to judge whether the IR35 rules apply. If IR35 applies the PSC would then treat the relevant fees received by the company as deemed payments to the worker and thus account for PAYE and NICs.

HMRC have found it difficult to enforce their view of the applicability of the IR35 legislation to many PSCs. Many view the risk of being ?caught? by IR35, and thus being required to pay PAYE and NICs, is outweighed by the benefit of company profits being paid out under a ?low salary, balance as dividends? regime.

The new legislation therefore shifts the responsibility to the public authority. This means that the risk of non-compliance falls onto the public authority. If the public authority decides the new rules do not apply they may have to have a protracted dispute with HMRC which ultimately may go to a Tax Tribunal. If the Tribunal decides against the public authority, the authority will have to pay over PAYE and NICs to HMRC, having already paid the gross fees to the PSC.

What can you do if you disagree with the public sector authority deducting PAYE and NICs?

Unfortunately there is no formal right of appeal to HMRC or the Tax Tribunals in the legislation by you or your company.

If it is a new contract entered into after 6 April 2017, the expectation would be that you and the authority would agree the treatment, and the fees charged by you, within the initial contract.

If it is an existing contract a discussion will need to take place with the public authority as to the reasons for their decision. The public authority must inform your PSC whether or not the contract falls within the new off-payroll rules. The public authority must reply to the written requests for the reasons why the authority reached a conclusion within 31 days of receiving the request.

You can use the tool to see if you obtain a different conclusion. If you obtain a result which confirms self-employment, we suggest you contact the public authority as soon as possible. You can also contact us to discuss the matter.

What is the tax effect on you?

The important point to appreciate is that you will be treated in tax terms as an employee of the entity that pays the PSC for your services. So if a contract ends during the 2017/18 tax year, the paying entity will send you a P45 showing the total deemed payment and deductions for PAYE and NICs. If the contract extends over the 2017/18 tax year, the paying entity would issue a P60 to you showing the total payment and deductions in the 2017/18 tax year.

You will need to show the amounts on the P45 or P60 as an employment on the employment pages of your 2017/18 self assessment tax return.

The amounts of income tax recorded as paid by you on the P45 or P60 may well not be the correct amount of income tax payable by you. Please look at the first part of the example in the Appendix which illustrates how PAYE and NICs are deducted from the deemed payment by the paying entity.

The other important point to appreciate is that it is your company which is receiving the amounts from the paying entity. How can you extract such income tax efficiently? The proposed legislation introduces special rules to allow you to do so.

What procedures does your PSC need to follow if deemed payments are received?

The PSC will report the net deemed payment as income subject to corporation tax. To the extent that it passes on the deemed payment to you it will get an equivalent deduction from its income subject to tax. So if it pays the full net payment to you, there will be no corporation tax charge on that income. However there may be timing issues if the amounts are not paid to you before the end of your PSC?s accounting period.

Please see the second part of the example in the Appendix which illustrates the procedures your PSC will take in passing the net deemed payment to you.

What if your company has other contracts hiring out your personal services?

Nothing has changed in respect of contracts your company has with private sector clients. The possible application of IR35 needs to be considered but there is no change in the law regarding IR35. If private sector contracts are not caught by IR35, we will help you decide on an appropriate profit extraction strategy for the profit from these contracts. In broad terms, it will often be beneficial to take these profits as dividends as the income from the public sector work will already be treated as your employment income.

Income tax repayments may be due to you as you may have not received the benefit of your personal tax allowance.

Current status of the public sector rules

This letter is based on the Finance Bill 2017 and related guidance from HMRC. Some of the detail in the legislation may be amended in the course of its eventual enactment in the Finance Act 2017 (expected enactment date is early July).

How we can help

We can help you decide whether to discuss the operation of the proposed legislation with the public authority. We can also help you decide on an appropriate profit extraction strategy for the profit from private sector contracts.

If you have any queries, please do not hesitate to contact us.