The new legislation for public sector contractors came into place on 1 April 2017. What does this mean for you?
The “old” rules required the contractor company to assess the contractual and working relationship between the end client and the worker (normally a director of the personal service company). If this relationship was akin to employment then IR35 should be applied on that contract. If the relationship did not look like employment then the contract was outside IR35. We have blogged before on IR35 so check out some of our other IR35 posts if you want to know more about this test.
Key things to note:
The “new” rules ONLY apply to public sector contracts.
The “new” rules DO NOT apply to outsourced contracts
How are the new rules applied?
The public sector body has the responsibility for making the decision on whether a contract is inside or outside IR35. The public sector body then has to communicate this decision to the agency and this decision should be passed down the chain of agencies before the contract starts.
It is the last agency in the chain, the agency that pays your limited company is responsible for deducting the correct amount of tax and National Insurance. BUT it is not the agency that makes the determination of status.
If a formal request is made then the public sector body is obliged to provide details of their analysis and decision making within 31 days.
If the public sector body does not take sufficient care then the liability for the tax and National Insurance will transfer from the agency to the public sector body.
HMRC have prepared an online tool to assist in this assessment and if you are outside IR35 using this tool then HMRC should have no questions. However the tool has fundamental flaws and does not accurately reflect the case law and the decisions made through the courts, so you may find your contract comes out as “unknown, need more information”. It is difficult to argue your case with the public sector bodies.
If all your work is in the public sector and the review process is fundamentally flawed then there is no point in operating through your limited company. A number of healthcare professionals have moved back on payroll or to umbrella companies. However there have been other side effects, a number of contractors have walked out and consequently various publlc sector IT projects are now short on man-power (including at HMRC!) – could they not see this coming?
The future – could this come to the private sector?
Again it annoys us at Clearways Accountants that the Government praises the flexibility of the UK workforce and then does it’s best to stop the freelancer/contractor making a proper living. For the moment, private sector contractors are not affected by the change.
We would like to think that the private sector would use more initiative than the public sector if the Government tried to make this change. Private companies could ensure that all their agencies use IR35 compliant contracts (IPSE, Independent Professional and Self-employed group have such a contract) and they could ensure that their on-boarding process for new contractors includes information on the process required to send a substitute.
This would not be a difficult change to make and for private companies needing expert, skilled knowledge for a limited amount of time this should be very manageable – why the NHS and BBC never bothered to do this, is just thoughtlessness!
If you need help with your contract review and IR35 – then please give the friendly team here at Clearways a call!