New tax clamp down to hit public sector workers

Tax cuts affecting London transport

Following George Osborne’s announcement on a crackdown on the use of personal service companies by public sector workers, about 26,000 public sector contractors are going to experience a drop in their income which could be as much as 20% monthly.

The terms “personal service companies” or PSC, is a situation where a taxpayer who is working as an agency employee, freelancer or consultant, incorporates their own limited company and bills their employer with it. A PSC in simple terms is a limited liability company, usually with a sole director who is typically the only or majority shareholder. The term has now attained buzzword status for the Treasury who now interpret PSC as ‘disguised employment.’

NHS workers and even staff at the BBC have been discovered to utilizing this method to get the best out of their incomes which prompted the Treasury to treat anyone working through a personal service company as being in ‘disguised employment.’

This clamp down on tax avoidance by HMRC which came into force on April 6, aims to ensure that public sector bodies who have contractors in their employment through these one-man-band companies, deduct national insurance and income tax before paying them.

Sequel to the new changes, contractors who work through their own company for the public sector will be unable to claim responsibility for their own tax assessment.

These changes resulted from the fact that PSCs are intentionally paying lower taxes than they ought to. Admittedly, they may have been acting within the rules as they once stood but there’ve been questions over whether or not they were adhering to their spirit.

These changes are part of the government’s resolve to address the issues above as well as cracking down on disguised employment and tax avoidance which reportedly costs the Treasury about £430million yearly.

Those who are currently affected by the changes are public sector contractors such as surveyors, social workers and local government workers who work on private contracts for public sector bodies who will no longer be considered off-payroll. The objective is to establish whether money paid to a PSC should be viewed as employment or corporate income and also clamp down on businesses that have a single client, similar to working as an employee.

The issue was brought to the fore some years ago when a probe by the Department of Health discovered that over 2,400 NHS staff were, instead of receiving their salaries directly from the public account, receiving payment as contractors.

An estimated 2,300 Transport for London workers, many of which were in middle management, were, therefore found to have set up one-man companies to enable them to pay as little as 20% tax on their income.

The question many may ask is, “is there still any point in using a company? As expected, the appeal of operating through a PSC will quickly fade for a lot of workers in the public sector as they will now be taxed as though they are employees.

Alternatively, workers who shun PSCs may be able to work directly for the end client on a fixed-term contract. They could also make use of an “umbrella” company which operates as an employer to the contractors.

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