Reforms to IR35 will be a major blow to public sector contractors, Alister Biggar takes a closer look.
Reforms to IR35 in the public sector are set to go ahead with no delay, the Chancellor has confirmed in his Autumn Statement. This means that those who engage with contractors will assume responsibility for confirming contractor status and with that the associated tax liability. This will be implemented from April 2017 and a private sector rollout is also expected to follow a year later.
‘The Government believes public sector bodies have a duty to ensure that those who work for them pay the right amount of tax. This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.’
‘Rapidly rising incorporation and self-employment is hitting tax receipts.’
What exactly is IR35?
First introduced in 2000, IR35 was intended to stop contractors from incorporating as a limited personal service company (PSC) in order to avoid paying tax and NICs. A PSC is usually a limited company through which the worker is contracted to supply services, but of which the contractor is the owner and sole director. They are typically used by suppliers of professional services such as IT, and in the oil and gas sector and where IR35 applies, the contractor must pay broadly the same tax and NICs as an employee would.
IR35 is also known as ‘intermediaries legislation’ and it is a set of rules that affect your tax and National Insurance if you’re contracted to work for a client through an intermediary. You may need to follow IR35 if you work for a client through an intermediary.
The intermediary can be:
• Your own limited company
• A service or personal service company
• A partnership
If IR35 applies then the intermediary has to operate PAYE and National Insurance contributions on any salary or wages it pays to you during the tax year. The rules are designed to make sure that the right rate of tax and National Insurance is paid for you.
IR35 may also apply if you’re working through an intermediary and you:
• Or your intermediary, or client are abroad
• Work in the construction industry
• Are an office bearer
• Work with your partner or spouse
• Are working, through an intermediary, for a charitable organisation
The Autumn Statement also highlights that the 5% tax-free allowance will also be withdrawn from those working in the public sector, claiming that it reflects the fact that workers no longer bear the administrative burden of determining whether the rules apply.
It is now up to public sector contractors and engagers to ensure they’re fully prepared for the changes to mitigate their impact. But contractors will be pleased to hear that no changes to taxation on dividends have been announced. However, tax avoidance is high on the list of priorities for the Government and contractors who use a tax avoidance scheme will be subject to a new penalty, it is estimated that these new measures will save around £2 billion over the forecast period.
What does this mean?
These changes do mean that contractors must ensure that they continue to work as a genuinely self-employed consultant on their contracts. It also means that there is absolutely no change for contractors working with private sector clients and in these circumstances, contractors will continue to bear the responsibility for assessing their IR35 status.
However, the decision as to whether to pay tax under IR35 or not will now be taken out of the contractor’s hands and it will be crucial that the party that engages with the contractor will now be responsible for this and must ensure that they come to the correct decision and do not simply tax all of payroll workers under PAYE.
It is vital that as both an end client or as a contractor, you must be fully compliant with this legislation, if you require advice about IR35 then please don’t hesitate to get in touch with us at JRW.