PSC tax rules are once again in the spotlight

Last week it was announced that two government departments have received fines amounting to £1.5 million pounds for breaching the off-payroll contract rules. The breach that gave rise to the Ministry of Defence’s fine was due to failing to seek assurance from a number of workers on their tax arrangements as a result of an administrative error. The Department of Health’s fine was awarded for failing to ensure that two board members were on-payroll within six months of employment. Worth noting, these fines will be donated to relevant charities, with £1 million earmarked for military charities and £470,740 for health charities.

These heavy sanctions demonstrate the government’s continued commitment to ensure that the public sector demonstrates the highest standards of integrity. This follows from the introduction of tougher rules by the Treasury in 2012 to tackle tax avoidance of off-payroll public workers.

The new rules state that contractors working under a contract with a government department for six months or more have to verify that they are accounting to HMRC for the correct amount of tax. Those working through a PSC are obliged to provide specific evidence that they are outside the scope of IR35, which requires them to undertake HMRC’s “business entity tests”(BETs) in order to assess the risk of an HMRC investigation.  However, in light of the fact that BETs are scheduled to be scrapped from the 6th of April 2015, it is not yet clear how the off-payroll rules for government departments will change, and there is no sign currently of plans to replace them.    

The Treasury will continue to monitor compliance with the rules, and another review is expected for the financial year 2014-2015. Notwithstanding the breaches found, the review indicates that 95% of government departments are operating the rules effectively.