Public Sector - Contractors
While contracting in the public sector you need to consider
legislation that could affect you.
IR35 changes for public sector workers: a brief summary
What is IR35?
The off-payroll rules (often referred to as IR35 or the intermediaries legislation), were introduced in 2000 and are designed to ensure that individuals who work through their own Limited company (aka Personal Service Company or PSC) pay employment taxes in a similar way to employees, if the nature of the work that they perform would mean that they’d be an employee of the end-user if they were not working via their own PSC. These rules are designed to support the established principle in UK tax law that tax liability should be determined by the actual working practices themselves and not the structure through which payment for the work is made.
IR35 looks at the manner in which your work is being delivered and up until this point has placed a responsibility on your PSC to determine your IR35 status and pay taxes accordingly.
What are the new rules?
New rules are being introduced for off-payroll workers working for a public sector body. There are no changes to IR35 for those workers working in the private sector.
Under the new rules responsibility for deciding if the off-payroll rules apply will become the responsibility of the public sector body itself, rather than remaining the responsibility of the PSC.
Once the public sector body has made a decision and determined that the off-payroll rules apply, it is then the responsibility of the “fee payer” (i.e. the entity paying the PSC) to account for Employers NI and to also carry out a deemed salary deduction (deduction of income tax and Employees NI) before paying the PSC. In instances where the public sector body determines that the off-payroll rules do not apply, the PSC can (continue to) receive gross payments.
The 5% expenses allowance currently available to PSC’s will be removed for those PSC’s working in the public sector. HMRC have argued that a public sector PSC should no longer have access to this allowance since it no longer carries the burden and responsibility of determining its own IR35 status (and as such its administrative costs are therefore reduced).
HMRC will be introducing a new digital tool to help public sector clients determine whether engagements fall within the off payroll rules.
What constitutes the public sector?
The definition being used to determine what constitutes the public sector is that set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002. This definition covers organisations such as:
- government departments, executive agencies and non-departmental public bodies
- police and fire departments
- local authorities
- devolved administrations
- educational establishments (including universities)
- BBC & Channel 4
- Bank of England
The consequences of these changes on your tax position
Since IR35 legislation itself is not new, your agency is working on the assumption that your PSC has already been meeting its responsibilities with regards to IR35 in respect of each assignment that it undertakes, and that therefore you should not experience any significant change in your final tax position.
Broadly speaking, these latest amendments to IR35 legislation change only the position in the contractual chain at which the taxes must be accounted for when IR35 applies, and do not in themselves change the total amounts of taxation due when IR35 applies.
However, you will see a significant change in your PSC’s tax position if there is a discrepancy in the results of your previous IR35 assessment of your position and the assessment carried out by your public sector client.
In instances where your client has determined that your working practices are such that you are caught by IR35, then the following employer costs exist in relation to the work that you are carrying out and must be accounted for by the fee payer to your PSC:
- Employers NI
- Apprenticeship Levy
The following employee liabilities must also be accounted for by the fee payer via a deemed salary deduction on your contract income:
- Income tax
- Employees NI
Liberty Bishop can provide you with bespoke calculations to give an indication of your tax position.
You may decide that it is no longer worthwhile operating via your PSC if it is determined that you are caught by IR35 and that your PSC must therefore be paid under deemed salary deduction. As an alternative to trading via your PSC, you may wish to consider switching to an umbrella solution where you will be an employee of the umbrella company. The net retention that you receive via an umbrella company will not differ from that of your PSC (within IR35 status), also you would no longer have the financial burden or the directorial and administrative responsibilities that you currently have with your PSC.
Liberty Bishop provides an umbrella solution and would be happy to discuss this option further with you. However, before you consider switching to an umbrella option, you should first speak with your PSC accountant to determine whether there will be any costs involved in terminating your relationship with them.
Speak to Liberty Bishop?
We appreciate there is a lot to digest with this legislative adjustment. We are more than happy to discuss your personal circumstance and provide you with best practice advice and offer a solution that suits your requirements.
Please do get in touch with TeamLB.