New PAYE/NIC rules for ‘off-payroll’ workers in the public sector

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From 6 April 2017, public sector employers who engage workers through personal services companies (PSCs) will be required to operate PAYE and pay National Insurance Contributions on the fees paid to the PSC.

This will apply whether the public sector employer engages the PSC directly or via a third party such as an employment agency or outsourcing firm. In effect, this reverses the existing IR35 regime under which the PSC is required to operate PAYE and NICs on deemed income. Under the new rules, the public sector engager must decide whether IR35 applies and, if it does, must take responsibility for calculating and paying income tax and employee and employer NICs and reporting to HMRC.

The test is simple at least on paper. A contractor will be covered by the new rules if they are required to do the work themselves and the engager decides, or has the right to decide, how the work should be done.

Public sector organisations and contractors have raised serious concerns about the new regime, not least because the test is a very blunt tool and may lead to large numbers of contractors working in ‘false employment’. There is also a concern that it may drive individual contractors out of the public sector or lead to an increase in day rates to absorb the extra costs. Some employers may opt to contract with large corporate consultancies only to avoid falling foul of the new regime.

Whilst this change only applies to the public sector, it is thought likely that the Government will look at rolling it out in the private sector in the future.

If you would like further advice on this topic please contact David Smedley or Andrew Rayment.