Budget 2016: PSC contractors to face tax crackdown from 2017

The recent Budget 2016 announcement spelt bad news for a number of contractors who work for the public sector.

From April 2017, it will be the duty of public service organisations to investigate the tax affairs of their PSC contractors to make sure that they are all in order. The new government measures have been set in place to ensure that they are paying the right tax and aren't involved in any tax avoidance or evasion.

It is suspected that contractors in the public sector are getting away with not paying HMRC enough in tax since they are being paid as a company and only commanding a corporation tax of 20%, as opposed to being paid as a person where tax is paid at a rate of 40%.

"Public sector organisations will have a new duty to ensure that those working for them pay the correct amount of tax rather than giving a tax advantage to those who choose to contract their work through personal service companies (PSCs).” said Chancellor George Osborne in his Budget 2016 address.

It's not known whether PSC contractors will be put on their client's payroll to be taxed correctly as it is not specified in the Red Book. However, it does state that there will be a series of tests and online tools for clients to carry out to ensure the right tax is being paid.

"From April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. The government will consult on a clearer and simpler set of tests and online tools. (Finance Bill 2017) (40)." As stated in Section 2.40 of the Red Book.

Other changes from the Chancellor's Budget 2016 announcement that could affect contractors include a new dividend tax rate and the removal of the Travel and Subsistence relief tax from April 2016.

You can find out more about other changes at ContractorUK.