Impact on tax and National Insurance of Personal Service Company changes
It has become common for individuals who provide services to certain businesses to set up a Personal Service Company (PSC) to provide those services, instead of fulfilling the role as an employee.
From April 2017, however, certain changes apply to individuals providing services to the NHS or other public bodies through a PSC arrangement.
A typical example would be Dr A, who is a specialised medical consultant. Instead of working as an employee in Hospital B, he creates his own PSC through which he provides his services to Hospital B. The PSC would invoice Hospital B and Dr A would be duly remunerated by the PSC.
In terms of tax savings, this type of arrangement can be attractive for both parties. Dr A can reduce his income tax and National Insurance Contributions (NIC) costs significantly by availing of lower dividend tax rates; and Hospital B can benefit by not incurring Employer NIC.
Unsurprisingly HMRC has been targeting these types of arrangements. In 2000 it introduced anti-avoidance provisions known as IR35 Rules. Where the rules applied, the PSC was required to make a deemed payment subject to PAYE and NIC at the end of the tax year and pay the associated tax and NIC to HMRC.
Prior to April 2017, the onus was on the PSC to apply and operate within the IR35 Rules. Interest and penalties would also be charged for incorrect operation of the rules.
From April 2017, the Government has gone one step further by moving the responsibility for applying the IR35 Rules from the PSC to the relevant public sector body.
Therefore, where IR35 applies, the public sector must make payroll deductions on payments to the PSC. In all other cases, the responsibility continues to remain with the PSC.
The Government introduced these changes after stating it lost an estimated £400m in revenue each year as individuals working via PSCs were not paying sufficient tax.
HMRC plans to support the public sector by spending around £1m on IT systems to include a digital tool intended to give certainty on IR35 cases.
However, it is anticipated that rather than face penalties and interest over incorrect operation of the rules, the public sector is more likely to err on the side of caution and operate a payroll function on all payments to the PSC.
These changes are likely to drive up costs in the public sector, including the already struggling NHS. Employer NIC and administration costs will increase, and public sector bodies may be driven to increase fees to retain specialists in vital roles.
So what should public sector bodies and relevant PSCs be doing?
Both parties should ensure that they are comfortable with the factors indicating whether IR35 applies or not, and the worker's status should be clearly stated in any contract before signing. If in doubt, consult with a tax specialist.
- For further information or advice, Danielle Foote can be contacted at Danielle.firstname.lastname@example.org Grant Thornton (NI) LLP specialises in audit, tax and advisory services