Are you contracting in the public sector?

As you may have read in our Autumn Statement commentary, changes in April 2017 will mean that contractors working in the public sector will no longer have a say in their IR35 status. Instead the responsibility to determine IR35 status will rest with the public sector body. If the contractor is engaged via an agency then the payment of tax will be made by the staffing agency or intermediary with the contractor (or the contractor’s limited company) receiving payment after deducting employment taxes where IR35 applies (potentially costing the contractor another 20% in tax). Frustratingly we are only a couple of months away from when this all starts and there is no legislation yet! We have put together this guide based on what we know so far however.

How will the public sector assess the IR35 status?

Of most concern here is “who is actually making the decision”. Will it be the contractor’s contact at the public sector organisation, who arguably knows more about their working relationship than anyone else, or will there be a policy approach such as “everyone in that department is caught” or “everyone who has been here for more than x years is caught”. It remains to be seen, however, we do know that TFL have started to send out communications, offering a number of options, with retaining the ltd company services being a last resort. Other public sector contractors we have spoken to have said that their work is so critical that the public sector organisation would not risk losing them by changing their status.

Most of the public sector has had a system in place for procurement of contractors and determining status for a number of years. A questionnaire was completed by the contractor and then sent off to the HR department to analyse and decide how that contractor would be paid. This system is going to move online with a new online test to be completed by the public sector engager or agency. It is not yet available (Beta due February 2017) but it will be interesting to see what questions are being asked here. Surprisingly it will be optional so as to reduce admin on the user. As they will be the ones with the liability in future it is hard to see them not using it. It is also difficult to see how good this online tool will be – IR35 is a notoriously complex area and in my opinion not one that can be determined by an online tool…unless biased in favour of classifying contractors as caught by IR35.
From talking to some of our clients it seems KPMG are doing the rounds to advise contractors and public sector bodies on determining IR35 status and the impact of this. HMRC have been approached for assistance and ironically have drafted in contractors to help with the project!

What is a public sector body?

For the purposes of this legislation a public sector authority is that which is a public sector authority for the purposes of:

• the Freedom of Information Act 2000
• the Freedom of Information (Scotland) Act 2002

This is split up into different categories:

• Government departments, legislative bodies, and the armed forces
• Local government
• National Health Service
• Maintained schools and further and higher education institutions
• Police
• Other public bodies

More information on the list is here

What happens now?

Our advice is to speak to us if you believe the changes will affect you and let us know what your agency is proposing. We have a number of options available to you:

• Challenge the decision made by the public sector engager on IR35 status. We are also working with our IR35 expert directors at Abbey Tax to advise on this area. Until we have the legislation we don’t know if there is going to be an appeals process and if there is then how it would work.
• It is important to note that if the agency or end client are declaring you inside IR35 then that will apply to all payments received after 6 April 2017. Therefore, we would recommend trying to get all payments for March 2017 paid prior to 6 April 2017 to avoid PAYE being deducted at source.
• If PAYE is deducted by the agency or public sector body then this is just an indication that that public sector body believes you to be caught by IR35 (or just wants to avoid the risk of having to pay the liability themselves) it does not always mean that you are caught by IR35. If the contract is not caught by IR35 but tax has been deducted at source then this tax could be reclaimed at the end of the year by submitting corporation tax and personal tax returns to this end. The overpaid tax would then be refunded back by HMRC.
• Continue to operate under your ltd company with this contract caught by IR35 (although that doesn’t mean that future contracts either public or private sector would be). Many will want to negotiate a higher day rate as a result.
• Operate under an umbrella. An umbrella company will take on the contract from the agency and your employment.

So the end client pays the agency, the agency pays the umbrella and then the umbrella pays the worker as an employee after deducting fees and tax and NI under PAYE where applicable. If your agency is asking you to engage via an umbrella then we can help here by transferring this contract to our sister company SG Umbrella.

If you are contracting in the public sector and believe you will be affected by these changes please do get in contact with us to run through your options.