In April 2017 new legislation will be introduced for public sector organisations that contract with individuals who work through their own limited companies. The definition of public sector is quite extensive and the reform will affect bodies such as schools, further education, local authorities and higher education institutions.
Currently, where an individual provides their services to a public body through their own personal company, all payments to that company may be made without deduction of PAYE and NIC. From April 2017, public bodies must determine whether to subject the payments to PAYE and NICs. This will apply where the individual is working in a similar way to other employees of the public body. Where the public body does not make the correct determination it may be liable for any underpayment.
It is not possible avoid these rules by using agencies as the obligation to determine whether income tax and NIC are due lies with the public body as well as the agency.
These changes mean that all public bodies must review the current arrangements with their workers, especially those workers who provide their services through a personal company. This is a complex area and HMRC has indicated that it will provide a set of clear objective tests and develop a simple straightforward digital tool to help public bodies make the right decisions.
That review should include, amongst other things:
- the existing contracts to ascertain whether a deduction is permitted;
- how the increased cost of NIC is dealt with;
- arrangements with third parties such as agencies;
- the policy in relation to engaging off payroll workers; and
- the process for engaging workers within the new legislation.