Service companies and the public sector

By Tolley

The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Service companies and the public sector
  • Applying the rules in the private sector
  • Overview
  • What is a public sector body?
  • Intermediary employers affected
  • Obligations of public sector body
  • Calculating the deemed direct payment
  • Implications for the service company
  • Implications for the worker
  • What happens where the intermediary is a partnership?

Following various reviews of the personal service company (PSC) legislation (also known as IR35), the Government took a new direction in Finance Act 2017, treating public service bodies which engage workers via service companies differently from any other end client of such companies.

FA 2017, Sch 1

As from 6 April 2017, where a public sector body uses the services of an individual supplied by a PSC or a managed service company (MSC), that public sector body, or an intermediate procurement agency it may use, has to consider whether the new public sector version of the IR35 rules apply.

ITEPA 2003, Part 2, ss 61K–61X, Chapter 10
Applying the rules in the private sector

At the Budget 2018, it was announced that these rules will apply to large and medium businesses in the private sector from 6 April 2020. It has been confirmed, in Agent Update 69, that small companies (ie those not included in the new legislation) will be defined by the Companies Act 2006 definition. As set out in the Off-payroll working in the private sector (IR35): Budget 2018 brief , there is to be a further consultation on the details of the new arrangements and draft legislation is expected in summer 2019.


Normally, where a worker provides his services to an end client through a PSC or an MSC, it is up to the PSC or MSC to decide whether or not the worker would be an employee or office-holder of the client if he were engaged directly. If he would be such an employee or office-holder, then the PSC or MSC has to calculate a deemed employment payment(s) which it is treated as making to the worker and it has to account to HMRC for income tax and NIC in respect of the deemed payment(s). For more on the normal rules,

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