Personal Service Companies and Tax

From 6 April 2017, HM Revenue and Customs (HMRC) have introduced a new system for taxing payments to some outside contractors and consultants. This applies to all universities and other public bodies.

Under these new rules, payments to workers who operate through a small company (known as a Personal Service Company or PSC) may now be subject to income tax and National Insurance (NI) deductions. These companies often (but not always) comprise just one individual.

This system - often referred to as IR35 - already applies to self-employed people who work under their own name (also known as sole traders), but it has been extended to those who operate through a PSC (which may or may not be a limited company). The University is now using a single process to assess the employment status of both sole traders and people working through a PSC.

Whether or not we have to change the way we treat each PSC will depend on how we engage with them for services. Summary details of the planned change in rules are set out on the HMRC website:

Legally, the University has no choice but to comply with these changes from 6 April 2017. There is also an additional cost to the University in paying employers’ National Insurance contributions (NICs) and the new apprenticeship levy. For further details, please see the section on Increased Costs to Schools.

A further complication is that HMRC has operated to a very tight timetable, with the final draft of the new rules announced only one week before the new rules come into operation. This has caused obvious problems for the University when introducing the new system.

The University deals with PSCs via two routes:

  1. As directly engaged suppliers, paid via Accounts Payable; or
  2. Indirectly through an employment agency, where the agency engages the PSC, invoices the University and subsequently pays the PSC.

HMRC have imposed different rules for these two routes after 6 April 2017. However, in both cases the role of the Engaging Manager is vital.

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