Personal service companies - the end of the road?

Before George Osborne delivered his Budget, there had been speculation that under the umbrella of ‘tax avoidance’ he would announce measures to tighten up the use of personal service companies (PSC) and undertake a restructure of IR35 rules.

In his speech Osborne said “public sector organisations will have a new duty to ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies.”

We have been following the announcement and watching for the publication of any further guidance. So, at this stage, following the budget what do we know?

A technical note has been published this afternoon:
  • The new duty for public sector organisations to “pay the correct tax” will mean that employers will need to operate PAYE and NI with rules to be brought in the Finance Bill 2017. So Government Departments, NHS Trusts, BBC and Channel 4 employees (to name but a few areas that have been highlighted in recent years), will be under this ‘duty’. When IR35 was introduced just over 10 years ago the intention was to make the individual using the PSC responsible for operating PAYE and NI.
  • There is no mention of wider application to the private sector use of personal service companies which has been prevalent in the entertainment industry.
  • There was no mention of reform of IR35.
The Government has said that their proposals will be published in more detail in a consultation document to be issued by the summer. The points listed for consultation cover the definition of ‘public sector’ for this purpose and developing a clearer test to determine if employment status applies.
However, we think it is only a matter of time before the principles are extended further. If the public sector rules are introduced from April 2017 then it would not be a surprise if the wider roll out came from 2018/19. We are told that guidance and tools to help determine whether an employment engagement applies will be made available by HMRC. We would view these with a little caution, as the questions can be subjective and ignore individual circumstances but we will await the consultation.
The Treasury may also be awaiting the outcome of HMRC test cases on historic use of entertainment industry PSCs before moving further, so for now there is no change outside the public sector but watch this space as we think this window will eventually close.
It is a case of put our own house in order then move on to everyone else!

For further information, please contact Philip Clark.