As summer drew to a close, so did HMRC’s consultation on proposed changes to the intermediaries legislation for off-payroll workers in the public sector.This planned reform of the IR35 rules was announced by the government in the 2016 Budget.
The crux of the matterIt is proposed that, from April 2017, public sector workers operating their own limited company (also termed Personal Service Company or PSC), will no longer be responsible for determining the IR35 status of their contract. Instead this will fall to the recruitment agency, public sector employer or other third party who is contracting with the individual’s limited company. If IR35 applies, the party who pays the PSC will also be obligated to make appropriate PAYE tax and NIC deductions and carry out the associated reporting requirements through RTI. It is further proposed that if the recruitment agency or public sector body is found to have assessed IR35 status incorrectly, they will be liable for underpaid tax and NIC and any interest and penalties. HMRC have expressed an intention to create an online tool to help determine whether IR35 applies to an assignment - this is expected to be available in late 2016.
Who will be affected?Anyone working in the public sector through their own limited company (PSC), including:
- Social workers
- Teachers & lecturers
- Local authority workers
- NHS workers
- Police & armed forces
- Other public bodies including television broadcasters BBC and Channel 4
What does it mean?So how will this reform actually affect limited company contractors in the above professions? At the outset of a contract the recruitment agency or public sector employer will decide whether IR35 applies. Currently the onus is on the individual to do this. If it is determined that a contract falls within IR35, it means the individual is deemed to be an employee for the purposes of tax and National Insurance. The agency or employer will deduct full PAYE tax and NI, as they would for a permanent worker. If it is determined that a contract falls outside IR35, arrangements will continue as they are today, with company directors being able to pay themselves a combination of salary and dividend and paying corporation tax. As the liability will fall on the agencies and public sector bodies, if the IR35 status is incorrectly determined, it is likely that they will take a very prudent approach and more people will be caught by IR35 than currently are. Indeed, HMRC have said that they expect most public sector PSCs to be caught by IR35.
At a glanceThe below illustrations are based on a £40,000 income and assume the limited company is registered for flat rate VAT.*
Reduced benefit… but still plenty of advantagesWhile being found to be within IR35 inevitably reduces the tax benefits of operating a limited company, it is important to stress that there are other real positives of contracting in this way. These will still apply irrespective of the proposed changes:
- Current IR35 caught companies claim 5% of income as a business expense through your limited company. HMRC are consulting on whether this will continue.
- Your limited company can still be registered for VAT which can increase profits. For example, a company revenue of £40,000, will generate £1040 in additional profit if the company is registered for flat rate VAT (assuming your contract allows you to charge your rate plus VAT and your services are in the scope of VAT).
- You will still be able to claim certain business expenses through your company, such as mobile phones or training required by the client.
- As a company director you will still be able to 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 professional locum in the public sector, having control of a limited company means that you are perceived as an established business in your own right.