Payments for services against receipt of an invoice (whether from a self-employed individual, a limited company, a partnership or an employment agency) are in principle taxed differently from those made to employees or workers, as payments to employees or workers are subject to Pay as You Earn (PAYE) and National Insurance Contributions (NICs).
In recent years there has been an increasing use by the private and public sector of contractors, who have provided services either as self-employed individuals or through limited companies (so-called Personal Service Companies or PSCs). HM Revenue and Customs (HMRC) have been concerned that self-employment and PSCs have been used to avoid PAYE and NICs and have focused their attention on this area. The Government are introducing new Off-Payroll Worker Legislation (affecting any payments made after 6th April 2017), which tighten the rules further.
The aim of the Off-Payroll Worker Legislation and existing rules around self-employment is to try to ensure that where services are provided to public bodies by individuals (either directly or through a limited company, partnership or agency) and those individuals would be treated by HMRC as “deemed employees” for tax purposes (under the principles discussed in more detail below) then payments for those services must be subjected to PAYE and NICs. The University has the burden of making the decision whether someone should be treated as a deemed employee for tax purposes. Being treated as a deemed employee does not mean that the individual becomes an employee of the University.
The cost to the University of making an incorrect decision on whether someone is a deemed employee can be up to 56.3% (2017/2018) more than the amount already paid in respect of the services.
|Thus a payment of £10,000 for services provided can at a later date attract additional tax, NIC and Apprenticeship Levy costs of £5,630 plus interest and penalties.|
This may arise after the original budget has been spent or a research grant closed, and may cover a period of several years. It is therefore critical for the University to establish the correct tax treatment before the services have been provided.