The Government is bringing in changes to their IR35 legislation from April 2017 which are likely to affect personal service companies (PSC’s) operating in the public sector.
IR35 in a Nutshell
IR35 legislation, in broad terms, was originally put in place to try to put a stop to contractors working through a limited company as “disguised permanent employees” and therefore taking advantage of the tax benefits of working this way.
There are several criteria which must be satisfied within each contract you undertake to ensure you are not captured by the legislation;
- Right of Control
- Right of Substitution
- Basis of Remuneration
- Tools of Trade
- Trading Structure
- Financial Risk
- Business Organisation
- Terms of Engagement
- Mutuality of Obligation
Where a contract falls under IR35, the income earned becomes taxable under PAYE and National Insurance Contributions are due. An allowance of up to 5% is given for the cost of running the company. From April 2016 there was no allowance given for Travel & Subsistence expenses.
IR35 From April 2017
HMRC are bringing in changes to make the tax system “fairer for everybody” and reiterate the point that they are tackling “disguised employment”
The key change from April 2017 for contractors working in the public sector is that determination of whether a contract is captured by IR35 will no longer fall to you, the contractor, but the end user. This will either be the public sector entity or the agency you work through.
There is a consensus that the agencies and public sector entities will take a prudent approach and deem many more contracts as within the scope of IR35; meaning ultimately your take home pay will be reduced.
Where a contract is deemed to be captured by IR35 the income will become taxable under PAYE and NIC and it will be the duty of the entity engaging the contractor (your agency or end-user directly) to deduct tax and national insurance at the correct rate.
Although for tax and Class 1 NI purposes the paying entity will be treated as your employer they will not be obliged to provide employment rights for example sick pay and holiday pay.
In addition to the above, the 5% expenses allowance will also be withdrawn as the responsibility of the administration will shift from you as the contractor.
It is important to note that this legislation will only affect the Public Sector, initially at least, so there may be scope to shift your work to the Private Sector. There is a suggestion that it may eventually cover the Private Sector too so this advantage may only be short lived.
There could be potential to negotiate the terms of engagement with your agency or the public sector entity directly to increase pay rates sufficiently to cover the increased costs of working under a captured contract.
You may decide that working through your PSC is no longer the best option for you once these changes come into force. If this is you, you could look to switch to operating under an umbrella scheme; the tax and NI deductions would be the same as working through your limited company but you would gain access to employment benefits.
There is also a petition you can sign here, if you feel strongly against the changes.