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More news about IR35 and public sector contractors

This blog provides more information about the government’s proposals to enforce IR35 will affect public sector contractors. The government have announced that the new rules will take effect from next April and will potentially affect doctors, nurses, social workers, teachers and government department contractors.

Let’s see how the new rules might work in practice:

Grace works through her own personal service company (PSC) and is appointed as a senior analyst at the Ministry when the post holder leaves. She is a locum appointed to a project for 5 months while the job is advertised.  Human Resources uses HMRC’s tool to see that Grace is working in the same way as an employee and the new off-payroll tax rules apply. Payroll are informed and tax and NIC’s are deducted from payments made to Grace’s PSC. The ministry pays the secondary Employers National Insurance (NIC) and accounts for the tax and NIC liabilities under RTI.

Grace’s PSC invoices the Ministry monthly for £2,400 which includes £400 VAT. The Ministry treats £2,000 as Grace’s earnings and deducts £223 tax and £159 employees NIC’s, which it pays to H M Revenue & Customs (HMRC) via Real Time Information (RTI) with £183 employers NICs. The Ministry pay’s Grace’s company £1,618. Because Grace has paid income tax on income going into the PSC, she receives a credit against employment and dividend income drawn out of her PSC so she does not pay tax twice. The corporation tax liabilities of Grace’s PSC will remain unchanged by the measure. The Tax and national insurance liabilities quoted are for illustrative purposes only based on current rates.

The above scenario begs three questions:

1) WHO will operate it in practice?
2) WHAT effect will it have on the public sector contractor market?
3) WILL it be rolled out to non-public sector contractors?

With regard to the WHO question agencies are unlikely to want to get involved with determining IR35 status so they may steer contractors towards umbrella companies. If end clients have to determine IR35 status they are also likely to take a conservative approach.

With regard to the WHAT question this may lead to Public Sector organisations offering the contractors they regard as invaluable full time posts within their organisation with other contractors being asked to collaborate and form a business entity through which to provide their joint services.

With regard to the WILL question I believe that the government’s measure to tackle PSC’s working in the public sector may extend to the private sector at a later stage. If this is the case the effect on the wider contractor market remains to be seen.

Employment Status is an area of tax which is very much in a state of flux, given the government’s current IR35 plans. If you have any queries about how all the current tax changes affect you please do not hesitate to contact me.

Robert Bradley
@rjbradley