IR35 Public Sector Changes for Contractors and Freelancers

Following the Autumn Statement, what does the IR35 public sector changes mean for contractors? Our easy to read FAQ will hopefully answer some of those key questions. 

1. Who is affected by the IR35 legislation changes?

The new legislation, referred to by HMRC as the ‘off-payroll working in the public sector: reforming the intermediaries’ legislation’ affects public sector bodies, but that does not necessarily mean that contractors will naturally fall within IR35. These changes apply to public authorities who hire off-payroll contractors. A public authority means a public authority as defined for the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002. For example, areas that could be affected include: 

  • Government departments
  • The BBC
  • Channel 4
  • The Bank of England
  • The NHS
  • Police and Fire authorities

2. What has prompted these changes?

There have been a series of high profile media stories on the growing use of contractors in the public sector.

HMRC is convinced that a large proportion of contractors, are disguised employees. This new legislation change, means the way which IR35 is enforced in the public sector, shifts the responsibility away from HMRC and onto the end client i.e. the public sector body.

Therefore, the contract should already be pre-determined before the contract comes over to the agency.

3. When will the changes come into force?

The changes will come into force from 6th April 2017. They will only apply to contractors working for public sector organisations. Instead of contractors determining their IR35 status, the government now wants public sector organisations, to determine the IR35 status for them.

If a contractor is deemed to be inside IR35, the engager, i.e. this could be the public sector or the agency, will deduct income tax and National Insurance as they would for employees.

4. How will the public sector organistations and agencies decide if a contract is inside or outside of IR35?

HMRC's online IR35 tool. The tool will ask users a series of questions about the nature of a contractor’s engagement, and determine their IR35 status based on the answers given.

5. What if my contract is ‘deemed outside IR35’? Can I still be deemed an employee?

Yes. If the contract does not reflect the reality of the working practices, then it offers no defence. This has always been the case but in practice is very difficult to enforce. By shifting the burden to the end client and asking questions about the day-to-day reality of the engagement, HMRC is hoping to arrive at a solution which is quick and inexpensive to administer.

6. Is there a risk that the online IR35 tool will be biased?

Organisations which represent contractors, including SJD Accountancy, have raised this concern. As such, we will be working with HMRC to test the tool and ensure that it accurately reflects workers’ employment status. As and when more information is available we will be sure to share this.

7. Is it still beneficial for contractors to work in both public and private sectors?

Yes, it is still beneficial for the contractor. This is dependent on the length of the public sector contract and each individual’s personal circumstances. We would always ask clients to speak to their accountant for a more comprehensive understanding on this.

8. If you are a Limited Company working inside IR35, is this still a beneficial option?

Working through a Limited company whilst inside IR35 still comes with the following benefits:

  • Contractors can still register for the flat rate VAT scheme whist working inside IR35 saving more of their hard-earned money throughout the year.
  • Contractors will be no worse off using an umbrella company over a limited company as fees are often the same, in fact some umbrella companies charge more than accountancy fees.
  • Once a limited company is set up contractors can then trade through it for other assignments which might be outside IR35.
  • With a limited company, all payment is paid directly into the company’s bank account. However, with an umbrella company the money flows to them and then to the contractor. A few years ago an umbrella called Prosperity 4 went bankrupt and the contractors didn’t get paid.

SJD Accountancy provides Umbrella Company Services to contractors and freelancers through our sister company, Parasol. For more information please call 0800 470 1549 or email bestadvice@parasolgroup.co.uk

9. Are the underlying criteria of the IR35 test changing?

The criteria for determining whether a contract falls inside or outside IR35 will remain the same. For example, if a worker is under the supervision, direction and control of the end client, they will be deemed inside IR35.

The only thing changing is that the responsibility for determining the contractors IR35 status is moving from the contractor/PSC to the public sector body.

10. Is this part of a wider crackdown on non-compliance with IR35?

Determining whether a contractor passes or fails IR35 requires a detailed knowledge of their working arrangements, not just the contract. Hirers are ideally placed to know the details of their contractors’ working arrangements, which is why HMRC is keen to shift responsibility and liability to them.

11. How will the public sector changes affect contractors take home pay from 2017?

Below you will find an average take home calculation for those working inside IR35, outside IR35 or through PAYE Umbrella. All contracts are different, so we always advise that should a more detailed breakdown be required please speak to your accountant.

2016/2017

  Outside IR35 Inside IR35 PAYE/Umbrella
Daily contract value £400 £400 £400
Take home * £69,377.15 £57,930.06 £54,927.51

 

 

 

 

2017/2018

  Outside IR35 Inside IR35 PAYE/Umbrella
Daily contract value £400 £400 £400
Take home * £69,780.52 £56,007.32 £55,239.51

 

 

 


*Please note, the above calculations are just an estimate and are based on 230 working days, some basic expenses and the contractor being on the flat rate VAT scheme (including 1% discount).

So contrary to much uncertainty in the market, as a contractor, you may be better working inside IR35 through your own limited company. For more details on going Limited, take a look at our easy to read guide: Advantages and Disadvantages of going Limited

We hope you have found this article useful, and if you are unsure about any of the above queries, please do not hesitate to contact our New Business team on 01442 275789 who will be more than happy to help. We will be sure to update you on any changes to this legislation as and when we can. 

To take advantage of our free IR35 review service, please click the following link: IR35 Review Service

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant* face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee of £120 plus VAT per month.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com.

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.