It’s fairly right to say that the much-dreaded IR35 changes, that are set to take course from April 2017, are covered in a cloud of confusion. The draft legislation is pretty complex and there’s no doubt about that! What’s even more troubling is that many public sector organizations have started taking steps against their off-payroll workers who work through their own limited companies.
If we go by the legislation, the responsibility to determine the employment status of the contractors directly falls in the public sector body’s lap and that they would be the ones to inform the agency about the decision for taxation and NI.
However, this is not the case. Apparently the agency, which invariably is the ‘payee’, becomes the ‘employer’ under the new tax rules – and this has been verbally confirmed by HMRC. The contractor becomes an employee for tax purposes only but receives no other employee benefits like eligibility for a pension.
Since public sector bodies hold little liability and by nature are risk-averse, the situation is rather troublesome. A number of contractors are in the process of leaving the public sector or not renewing their contracts to avoid dealing with the IR35 hassle!
Although the demand for a talented and skilled workforce is on the rise; it won’t be a surprise if the sector is soon deprived of a solid workforce – well to everyone other than the HMRC.
The public sector IR35 guidance is now out
HMRC published a document set on 3 February and it neatly sums up the new rules for PSC contractors, who are strongly advised to read these documents properly in order to operate within the new legislation. But since the much trumpeted test software, the Employment Status Service (ESS) will be launched later this month, contractors should keep in mind these 3 points:
- First of all, if a PSC contractor believes that (s)he has been wrongly taxed, then a “repayment claim” can be submitted for the same.
- Secondly, HMRC says that contractors can pay themselves a tax-free dividend up to the total of the net fee received from contracts in the public sector, where Income Tax and NICs have been deducted at source.
- Thirdly, PSCs have also been given the official position under the IR35 reforms on paying themselves salary; calculating corporation tax and VAT.
PSCs told to submit invoices before 6 March
Public sector contractors with 30 day payment terms, should submit their invoices before 6 March 2017 to ensure their payments are cleared before 5 April, and if they fail to do so then the payments could be subjected to punitive new tax rules. Invoices need to be issued to enable payment to take place by the end of this tax year.
It doesn’t matter when the work was undertaken – if the payment takes place after 5 April and the contractor is deemed to be inside IR35, they will need to pay tax and NI as if they are an employee. From the beginning of the next tax year, the public sector clients/agencies (the fee payer closest to the contractor) such as the NHS could put the contractors on their payroll and make the payments via the Real Time Information (RTI) system, more normally used for employees.
However, the story doesn’t end here. It is the responsibility of public sector organisations to assess each contractor’s IR35 status. And if evidence is to be believed, the public sector organisations are not willing or possibly not able to make proper IR35 assessments, because of which they will decide they are all inside IR35 and simply force the contractors into the RTI system and effectively onto the payroll – irrespective of what their IR35 status is!
This means that tax and National Insurance Contributions (NIC) will be deducted at source from 6 April, resulting in a significant loss of income for the contractors.
For any assistance regarding IR35 status assessment, tax management or deemed payment calculation, feel free to contact us.