Major tax changes for limited company contractors in the public sector come into force from today (6th April).
Company directors can no longer decide and declare for themselves the IR35 status of their contract. This decision is now the responsibility of the public sector body they are working for.
Additionally, responsibility for making the necessary deductions is now that of the “fee payer”, ie. the party paying the limited company, which may be a recruitment agency, employment intermediary or public sector body.
With rather a lot of uncertainty and conflicting information surrounding the changes, we take a no-nonsense look at the facts and fiction of the new arrangements.
“IR35 matters” – FACT
The IR35 status of an assignment dictates how much tax you will pay and therefore how much you will take home. If, under the new rules, your public sector engager determines that your assignment is caught by IR35, then most of the income paid to your limited company will be subject to PAYE tax and National Insurance deductions.
HMRC will automatically backdate IR35 decisions – FICTION
If your public sector body deems you as caught by IR35 where previously you considered yourself outside, it does not mean that HMRC will automatically backdate your new IR35 status for previous years. While it is possible, HMRC would have to open an entirely separate investigation into your employment status prior to April 2017.
To do this for every public sector limited company contractor would require a huge amount of work and resources from HMRC, so they are likely to be selective.
Public sector bodies don’t have to use HMRC’s tool to decide IR35 status – FACT
HMRC’s Employment Status Service tool is official but not mandatory. Public sector bodies don’t have to use it as their means to determine a worker’s IR35 status, although they are required to “take reasonable care” in how they come to the decision. This means that making “blanket” assessments of large groups of contractors are potentially risky for public sector engagers.
My income will be double taxed under these rules – FICTION
Some contractors have expressed concerns that they will be taxed once through PAYE and again through corporation tax. This is not the case. Your PSC can pay you up to the net amount it receives in income from the fee payer, without further PAYE or NIC liabilities. Your PSC will receive a corporation tax deduction fir these costs.
Even if I’m being taxed as an employee, I still don’t get employee rights – FACT
True unfortunately. Employment rights and employment taxes are not directly linked. To be entitled to employment rights you would have to be engaged as an employee under a contract of employment or argue (and win) that you were a disguised employee.
My company will be liable for the tax and NIC arrears if the public sector body get it wrong – FICTION
As the IR35 decision is no longer down to individual PSC directors, it would be unfair to penalise them if a decision is later determined as incorrect.
While there is a provision in the legislation to transfer obligations from the fee payer, it can only be applied in very limited circumstances, for example where a worker has given fraudulent information.
It is still worth operating as a limited company – FACT
Tax benefits should never be the only reason for contracting as a limited company. There are many other considerations which make PSC an advantageous business option.
- You will still be able to claim certain business expenses through your company, such as mobile phones or CPD and certain training required (but not reimbursed) by the client
- As a company director you can still take advantage of tax relief on lifestyle benefits such as pensions and life insurance
- Your company is a separate legal entity so your personal finances and assets are protected
- As a contracting professional, having control of a limited company means that you are perceived as an established business in your own right
- If you do some private or non-IR35 work you can put it through your limited company without worrying about reporting self employed income
If you have not already spoken to us about how the new IR35 rules in the public sector affect you and your business, contact us as soon as possible to arrange a FREE 1-to-1 telephone consultation.
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