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HM Treasury release details of arrangements for tax review of public sector contractors


7 September 2012: Following a spate of high profile cases in the media, HM Treasury has been considering how to review the tax arrangements of public sector contractors and has released details of its proposals.

Under the measures released, all public sector client organisations are required to obtain certain information about the tax affairs of certain contractors that they engage. This can be directly and also applies to contractors who are engaged through third parties (such as recruitment agencies), to public sector clients, and applies to contractors who:

  • Are engaged in the most senior positions within the department; or

  • Are paid more than £220 per day by their public sector client, and are engaged for more than 6 months (commencing on 23 August 2012).

These measures will also interest contractors who are considering undertaking work with a public sector client in the future, as they may affect key considerations for the contract (such as the length of engagement or the role to be fulfilled).

These new developments require Government departments to:

  1. Ensure that people engaged in senior positions are on payroll (unless there are exceptional circumstances lasting no more than 6 months); or

  2. Ensure that all other contractors earning more than £220 per day, on a contract lasting over 6 months can provide the department with assurances that they are complying with their tax obligations.

Any Government departments who fail to implement these requirements will face financial penalties and any contractors who do not provide information requested by their client may face having their contract terminated. They can ask for this information either directly, or approach third parties such as recruitment agencies.

Each department is likely to put their own specific emphasis on these requirements. However, the guidance from HM Treasury sets out the following framework for compliance:

The Government department engaging the services of the contractor must assess their employment status, to ensure they are truly engaged on a self-employed basis. This is consistent with the obligations on other businesses within the UK. So nothing will change for contractors engaged directly with a department.

Limited company contractors will be required to either:

  • Provide assurances that they have considered if IR35 applies to their assignment.

  • Demonstrate that they operate PAYE on their whole income from the company for the length of the assignment; or

There are several ways to ensure compliance with IR35. However, contractors who use the services of an accountant, who specialise in providing IR35 advice, such as Brookson need not worry, as long as they take appropriate advice as to their employment status before the 6 months review, when departments will start asking for this information.

Best advice for customers working with public sector clients is to ensure that an Employment Status Review (IR35) is carried out early in the assignment to avoid unpleasant surprises when your employment status is reviewed by the client 6 months into the assignment.

About Brookson:

For enquiries, contact Victoria McDonnell, Marketing Manager, at / 0845 058 1500.

Brookson was founded with the vision of creating an accountancy firm with a difference – a firm passionate about meeting the needs of our customers through innovation and personal attention.

For more than fifteen years we have been providing accountancy, tax and support services to contractors, freelancers and self-employed professionals around the UK – people like you, who were seeking something extra from their contractor accountants.

Thousands have benefited from our connected approach to their financial matters. Naturally, balancing your books is an important part of what we do, but we also offer specialist insights into your wider money picture.