An engaging challenge?
From April 2017, universities will be required to tax some companies as if they were individuals. This article explains what you will need to do, how to prepare for the change and how this will affect the HR department.
Most HR staff will be familiar with the concept that when engaging an individual to provide services on a self-employed basis, there are stringent HMRC tests that must be considered to determine if the worker should in fact be treated as and taxed as an employee.
These tests did not need to be applied if the individual was engaged to provide services via their personal service company (“PSC”) or agency and indeed many organisations manage the risk of employment status by requiring individuals to provide their services through a company or an agency.
From April 2017, the law will change so that universities and their wholly owned subsidiaries, will be required to apply the tests that apply to self-employed individuals to PSCs (even if they are supplied via an agency) and in some cases to tax them as if they are employees.
Universities will need to change processes to:-
- Review the nature of the work supplied by the PSC both at the outset of the engagement and for the duration of the contract;
- Decide if the work and the way the individual provides services would be treated as employment if it were provided by an individual rather than a PSC; and
- If it does, account for PAYE and National Insurance (employee and employer) on payments to the PSC.
Where PSCs are provided by an agency, they (the agency) will need to account for PAYE and NIC but the University will need to review the worker’s employment status.
MORE RISK, MORE COST
For all contracts caught by this legislation, the cost to the university will increase because employers NIC will be due on the amount paid to the worker.
In addition, where a university incorrectly determines the employment status of the worker, HMRC will collect any underpaid tax and NIC from the university. By way of example, this could increase the cost of a £60,000 contract by £25,000 to £40,000. Interest and penalties may also be applied.
WHAT DO UNIVERSITIES NEED TO DO?
To comply with the new rules and reduce the risk of unexpected tax liabilities, universities will need to:
- Review their current suppliers and identify those that are likely to be affected
- Create a process for identifying new suppliers who are caught by the new rules
- Modify Accounts Payable and Payroll systems and processes so that PAYE, NIC and VAT can be applied to affected suppliers
- Introduce processes for reviewing employment status of PSCs supplied by 3rd parties (including agencies)
- Communicate with their suppliers and those engaging them
This exercise should be well under way, if not complete by now, but if you have yet to start, you may need external support. KPMG have already assisted many universities in this review process.
WHAT DOES ANY OF THIS HAVE TO DO WITH HR?
Whilst this may initially appear to be simply an issue of taxation or payroll, it will inevitably require the involvement of HR departments.
In some universities, PSCs have been used as a quick way of engaging workers without needing to go through the more formal recruitment processes; a way of paying higher salaries in areas, such as IT, where it is difficult to recruit into university graded posts.
Some finance departments have already stated that the policy should be not to engage any more PSCs. Are your recruitment and remuneration policies agile enough to deal with the potential transfer of well remunerated contractors into employee status? What about the impact on employment rights, such as pensions?
Finally, some contractors have also stated that they will no longer accept work in the public sector. Will you have to change your recruitment and remuneration policies so that you can make employment sufficiently attractive and how does that fit with a universal grading system?
With less than a month to go, now would be a good time to thoroughly consider the impact of the new regime on your university. If you need to talk through any of the practical issues raised here, please contact Michael Wilson by email or phone on 0191 4013714.