UK Budget offers a few surprises employment tax-wise UK Budget offers a few surprises employment tax-wise

UK Budget offers a few surprises employment tax-wise
30 Apr 2016

Most of the UK's Budget 2016 announcements relating to employment tax were connected to prior announcements, consultations or discussion documents issued last summer and the hotly anticipated pension reform had already been wiped from the agenda as a result we saw few surprise changes on the day.

One has to wonder if there might be more to come when the Finance Bill and associated documents come out.

Intermediaries including Personal Service Companies and partnerships

By far the most interesting employment taxes announcement has to be the changes to how public sector organisations deal with Personal Service Companies (PSCs) from April 2017. Public sector organisations will have to take responsibility for operating, collecting and paying the relevant tax and National Insurance Contributions (NICs) for the PSC - currently it is the PSC which takes this responsibility.

What is an intermediary?

Chapter 8 Part 2 of Income Tax (Earnings and Pensions) Act 2003, which contains the intermediaries legislation, explains what is meant by an intermediary in this context. It is most commonly an individual’s own company or a partnership that they work through.

What is a public sector organisation?

Many organisations are caught by the definition of public sector. Public sector will mean organisations that are Public Authorities for the purposes of the Freedom of Information (FOI) Act 2000 and Freedom of Information Act (Scotland) 2002. And includes schools and further and higher education institutions, as well as the British Museum and BBC - so the impact is more wide reaching than we might initially think.

How will tax and NIC be accounted for?

The current assumption is that to work out the correct amount on which to pay tax and NICs, the engager will need to calculate an amount of deemed employment income (and earnings for NICs). This amount will be payable to the intermediary, less any VAT charged. There will also be a 5% deduction, reflecting the existing 5% deduction rules that apply to PSCs.

The balance is then to be included for RTI purposes and returned to HMRC in the normal way. The engager 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 to the relevant engager.

HMRC will consult on the detailed rules to ensure they remain as simple as possible to operate and it will be important that employers respond to this so that their thoughts are heard and HMRC understand the real impact on the employers.

The new measure will require the public sector organisation or the agency engaging the worker on their behalf, to obtain the necessary personal, company and tax information needed to operate RTI from the worker’s PSC.

What’s the impact?

Payroll is rarely involved with the engagement of these workers and the people who do the engaging could be local managers and exclude HR or Finance. Hence, there needs to be significant education within the organisation, a full review of all PSC engagements, new processes put in place and of course budgeting for employers NICs. It’s important that Payroll takes the lead within the organisation and works closely with colleagues in HR, Finance and Procurement.

A consultation on this change will be published before the summer, but we already have technical note issued as part of the budget papers.

And the impact may not stop at the public sector since after April 2017 it might be easy for government to extend this tax/NIC collection method on PSC’s into the private sector.

By Susan Ball, Partner, Head of Employers Advisory Services, Crowe Clark Whitehill LLP

Most of the UK's Budget 2016 announcements relating to employment tax were connected to prior announcements, consultations or discussion documents issued last summer and the hotly anticipated pension reform had already been wiped from the agenda as a result we saw few surprise changes on the day.

One has to wonder if there might be more to come when the Finance Bill and associated documents come out.

Intermediaries including Personal Service Companies and partnerships

By far the most interesting employment taxes announcement has to be the changes to how public sector organisations deal with Personal Service Companies (PSCs) from April 2017. Public sector organisations will have to take responsibility for operating, collecting and paying the relevant tax and National Insurance Contributions (NICs) for the PSC - currently it is the PSC which takes this responsibility.

What is an intermediary?

Chapter 8 Part 2 of Income Tax (Earnings and Pensions) Act 2003, which contains the intermediaries legislation, explains what is meant by an intermediary in this context. It is most commonly an individual’s own company or a partnership that they work through.

What is a public sector organisation?

Many organisations are caught by the definition of public sector. Public sector will mean organisations that are Public Authorities for the purposes of the Freedom of Information (FOI) Act 2000 and Freedom of Information Act (Scotland) 2002. And includes schools and further and higher education institutions, as well as the British Museum and BBC - so the impact is more wide reaching than we might initially think.

How will tax and NIC be accounted for?

The current assumption is that to work out the correct amount on which to pay tax and NICs, the engager will need to calculate an amount of deemed employment income (and earnings for NICs). This amount will be payable to the intermediary, less any VAT charged. There will also be a 5% deduction, reflecting the existing 5% deduction rules that apply to PSCs.

The balance is then to be included for RTI purposes and returned to HMRC in the normal way. The engager 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 to the relevant engager.

HMRC will consult on the detailed rules to ensure they remain as simple as possible to operate and it will be important that employers respond to this so that their thoughts are heard and HMRC understand the real impact on the employers.

The new measure will require the public sector organisation or the agency engaging the worker on their behalf, to obtain the necessary personal, company and tax information needed to operate RTI from the worker’s PSC.

What’s the impact?

Payroll is rarely involved with the engagement of these workers and the people who do the engaging could be local managers and exclude HR or Finance. Hence, there needs to be significant education within the organisation, a full review of all PSC engagements, new processes put in place and of course budgeting for employers NICs. It’s important that Payroll takes the lead within the organisation and works closely with colleagues in HR, Finance and Procurement.

A consultation on this change will be published before the summer, but we already have technical note issued as part of the budget papers.

And the impact may not stop at the public sector since after April 2017 it might be easy for government to extend this tax/NIC collection method on PSC’s into the private sector.

By Susan Ball, Partner, Head of Employers Advisory Services, Crowe Clark Whitehill LLP