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The rules on using Personal Service Companies (PSCs) in the public sector are set to undergo a radical overhaul in 2017.
The responsibility for deciding whether the intermediaries legislation applies will move from the person working through their own company to the public sector organisation. The Treasury has increasingly viewed PSCs as a tax avoidance strategy.
Under the new rules, public sector organisations will have to ensure the correct tax is paid in respect of the work they pay for.
The change won’t stop people who have established their own PSCs from receiving payment through the company. But it will end any tax advantage they currently enjoy.
HM Revenue & Customs (HMRC) has said that public sector employers will receive clear and objective tests they will be able to use to determine which engagements are affected by the rules.
This will be underpinned by a simple digital tool to aide public sector employers in coming to decisions on PSCs.
The danger is that genuine businesses will have to navigate through time consuming administrative tests before they can carry out vital work in the public sector.
This could be felt particularly keenly in the construction sector where the use of Personal Service Companies is widespread. And with major infrastructure projects including HS2 in the pipeline there could be a substantial impact if the new policy is not implemented smoothly.