Changes to IR35 in the public sector

HMRC are making fundamental changes to IR35 from April 2017 that could see people who have operated outside of IR35 in the public sector for years suddenly fall under its rules and take home considerably less income as a result.  The major change is that HMRC is moving the responsibility of deciding if a contractor is actually just an off-payroll employee from the contractor to the public-sector body they contract for.  This puts considerable pressure on the PSB’s to make a decision that would leave them liable for all the excess tax if they deem someone a legitimate business and HMRC disagrees.  Most experts agree that this will cause PSB’s to either determine that all contractors are now inside IR35 causing a 10-40% drop in take home pay or simply refuse to give contracts to limited companies.

 

Who will be affected?

It’s difficult to say who exactly will be affected because the reaction of the public -sector bodies is mostly speculation at this point. HMRC are developing an online tool that will give a ‘yes’/’no’/’borderline’ answer to the IR35 question so if PSB’s do decide to look at each contract their decisions are likely to be heavily influenced by HMRC.  The tool was only released this week so we don’t know much about it yet but if it reflects the opinion of HMRC there may be cause for concern.  When announcing the change HMRC stated (with no evidence) that 80% of contractors working within the public sector are simply avoiding tax so it logically follows that around 80% of the contracts put into the online tool will yield a ‘Yes’ answer that forces a contractor to be taxed as an employee or lose their contract.

 

How much difference will this make?

If you do fall under the IR35 legislation, the PSB will deduct tax and NI as if you were an employee so the business will be paid a net amount for your services that will be considerably lower than your standard rate.  You will however receive a tax credit that ensures you don’t pay corporation tax on income that has already been taxed through PAYE so you won’t suffer the full blow of these deductions.  Another aspect to consider is your expenses because if all of your business falls under IR35, expenses like accountancy fees, use of home as office, mileage to your workplace or stationery will not affect your tax bill and thus become a personal out of pocket expense.  Every situation will be different but most experts believe that contractors will lose between 10% and 40% of their income.

 

What can you do to avoid this?

The simple answer is to not work in the public sector, but if leaving the public sector is not an option then you should discuss the new legislation with the PSB you are contracting for and get a professional to look at your contract as soon as possible.  If you do all this and still find yourself within IR35 then your options are limited.  You either just accept the lower income, become an employee of the PSB and shut down your company, join an umbrella company or significantly increase your rates to offset the extra tax.

 

We are offering a comprehensive public sector contract review for £150 that involves contract specialists evaluating your contract, listing any changes you need to make and giving you clear and concise advice on how to proceed.  If you require any more information please do not hesitate to contact us.

 

You can also check out IPSE’s in-depth guide to IR35 in the public sector.