94% of contractors in the public sector are compliant with new PAYE rules clamping down on illegal use of Personal Service Companies (PSCs).

A review of governmental departments has found that only 6% of contractors were found not to be compliant with the Treasury’s new PAYE rules and will subsequently face investigation by HMRC. The large majority of contractors are now paid PAYE through departmental payrolls.


PSCs were used and abused widely in the public sector before new ‘off-payroll’ rules were announced by the Treasury. Contractors with a contract longer than six months or earning a daily rate more than £220 are required to provide sufficient evidence from a credible organisation to demonstrate that they are contributing the correct PAYE and NICs due, and are not caught by IR35 legislation.


In a review instigated by Treasury minister, Danny Alexander, the use of limited companies in government departments was investigated and revealed that over two thousand contractors and senior officials were falsely operating through PSCs for the purpose of decreasing their tax liabilities.


Danny Alexander said that the public sector had to lead by example in regards to compliance with tax legislation and that those who did not comply would be reported to HMRC.

“The vast majority of off-payroll contracts are in place for legitimate reasons and these workers are playing an important role by satisfying short-term needs for specialist advice and services. However, it is right that the public sector sets the highest standards in terms of its tax arrangements and that departments continue to assure themselves that all their workers are paying their fair share of tax.”