IR35 within the public sector has been a hot topic over recent months, leaving many individuals asking the question, what are my options come April 2017? Firstly, let's take a look at what the public sector changes are and what they mean for contractors.
1. What are the IR35 changes within the public sector?
The government has announced changes from 6th April in the way IR35 is administered for Personal Service Companies (PSCs) operating in the public sector. IR35 was introduced in 2000 to determine whether or not a contractor should be treated any differently than an employee, for tax and National Insurance purposes. The responsibility for determining a contractors IR35 status has to date, rested with the contractor but from 6th April this moves to the company paying the PSC, whether it is the recruitment agency, public sector body or someone else. We expect the vast majority of contractors will be viewed as an employee for tax purposes under these changes with normal taxes and national insurance deductions made and paid to HMRC.
2. What does the new legislation deem as “public sector”?
The legislation uses the same definitions of a public sector organisation as the Freedom of Information Act 2000 and Freedom of Information Act (Scotland) 2002. This legislation lists some public sector bodies by name.
3. Who is affected by the IR35 changes within the public sector?
All parties in the supply chain namely:
- The Public Authority - will be required, on or before the time of entry into the contract, to confirm to the fee payer (the person paying the PSC) whether the role advertised is inside or outside IR35. The specific question that Public Authorities have been asked to consider is "would you have taken this person on as an employee or a self-employed supplier if you had hired him/her directly?" HMRC has created an online tool to help the Public Authority to make the decision. Where they is no agency in the chain and the worker is caught by IR35, it must calculate, deduct and remit PAYE and NIC deductions to HMRC.
- A Recruitment Agency - an agency paying a PSC directly will need to deduct the PAYE and NICs where the public sector contractor is caught by IR35. The agency should have an opinion from the Public Authority about the IR35 status of the role.
- The PSC - Where the Public Authority or agency believe that the role is "caught by IR35" they are likely to see a decrease in net pay by about 10-15%. This is because the fee payer, which is likely to be the Public Authority or Agency, will have to deduct employment taxes before paying the PSC. There may also be complications in calculating the PSCs overall liabilities, which will be an issue for the PSC's accountant. The company director will need to provide personal details to the Public Authority (or agency) including their National Insurance number and date of birth. Currently only the PSC details are required for payment to be made.
4. How will the IR35 assessment be made for public sector contractors?
HMRC has released an online tool that can be used to assess whether a contract falls inside or outside IR35. HMRC has said it will accept the tool’s verdict provided the questions have been answered accurately. To be sure some agencies may get a second opinion from an expert.
5. How will the IR35 assessment be made if a contractor works for multiple clients covering public and private sectors?
IR35 applies whether the PSC operates in the public or private sector. Each role will have to be assessed separately. In the private sector the IR35 risk remains with the PSC rather than the agency.
6. Umbrella or limited company; which is the better option for public sector contractors?
Contractors should consider whether it is still financially viable to work through a PSC. For most, an umbrella will be more attractive as the take home pay is likely to be higher than through a PSC inside IR35 and it is less hassle. Workers also receive employment rights such as statutory sick pay, statutory maternity pay and holiday pay in an umbrella which they wouldn't have in a PSC.
7. Should limited company contractors who fall inside IR35 close their PSC?
Where a Public Authority states that the role is inside IR35 there is a concern that HMRC would then look at previous years and seek to raise an assessment. Due to this contractors should consider whether or not to close their PSC.
Given the impending changes to IR35 and VAT within the public sector, it is clear that for many limited company contractors, switching to an umbrella company solution before April 2017 may be the best option for them.
Alongside this, a growing number of agencies and public sector bodies will be more motivated to move their contractors over to umbrella solutions as there will be a much greater administrative and compliance burden placed upon them.
If you would like more information on what an umbrella company service is and how it works, you will find more help and advice here. Our Umbrella Company Service, My Max, helps contractors get paid on time, every time, stay HMRC compliant and provides all the benefits of continuous employment including all the lovely perks that go with it, both big and small.
For more information on how this legislative change will affect you and for advice on how we can help you decide what the best solution is for you, please call PayStream on 0161 929 6000