Off payroll working in the public sector

Off Payroll

From April 2017 (which is fast approaching!), the public sector will now have to review every limited company that works for it.

The public sector includes:

  • GP Practices
  • Dental Practices
  • Opticians
  • Pharmacies
  • OOH providers
  • CCGs

Who may this affect?

Any one who provides services for the public sector through their own limited company (this is known as a personal service company – PSC).  It only applies to PSCs not to sole traders or partnerships.

What’s changing?

The onus for PAYE and NIC liabilities will lie with the engaging party, from April 2017, and not with the PSC providing the worker.  This is a real game changer as it means that the engager, NOT the owner of the PSC, will have the power to decide if the PSC falls into the rules.

If the engager decides that the PSC is within the rules and should be treated as an “employee”, they will have to deduct PAYE and NIC BEFORE making any payments to the PSC.  The worker would not be transferred to the actual payroll under these rules, as it is just a deemed employment calculation.  However, if someone is treated as employed for TAX purposes, he/she might want to go on the payroll properly to get the benefits of sick pay, holiday pay etc.  Otherwise deemed employment would  be the worst of both worlds – PAYE and NIC without the accompanying employee protections!

How will this be done?

HMRC are developing a new digital tool to replace the Employment Status Indicator (ESI) for the public sector, called the Employment Status Service (ESS).  It is due out any day now (although still in “test” not final stage)!   Public sector engagers can use the ESS to decide if they should apply PAYE and NIC.   This may be cynical, but it is highly likely that it is going to be (a lot) harder to be self employed under the ESS than under the ESI!  And while it is an optional service, HMRC are likely to place a lot of reliance on it and may take more convincing about the status of an engagement if the ESS hasn’t been used.

Depending on the answers the new ESS gives in particular circumstances, it may be not appropriate to run certain contracts through a PSC after April.  The engager will need to decide if it would be better (if PAYE and NIC are going to be withheld anyway) to make them an actual employee for certain projects.

What can be done?

Some individuals may be thinking of going back to being a sole trader rather than working through their PSC, as the new legislations only affects PSCs, although this may be a short term solution.   Even in the case of sole traders, if HMRC successfully argue that someone is an employee, it is still the engager who is on the hook for PAYE and NIC (which is no different to the new PSC rules).  Therefore, not to sound all “doom and gloom”, it may only be a matter of time before engagers change the way they deal with sole traders/partnerships as well as PSCs.

The new PSC/public sector rules are a complex set of changes.  Engagers could misunderstand or “run scared” from the new legislation and decide that the safest thing for them to do is to apply PAYE and NIC at source, even when that may not be the correct outcome.

A way forward could be (should be?) to instigate a two way conversation between the PSC and the engager to get a proper understanding of the new ESS tool and what can be changed to reflect true self employment.  Easier said than done, perhaps, but it would be far better to get both sides happy with the ultimate arrangement rather than just “running scared”.


It will be a lot easier to see what HMRC think self employment for the public sector (including GPs and dentists) looks like once the ESS tool is released……keep a close eye out & start discussions with your tax adviser!

Contact Claire for further help and advice.

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