Advice for practitioners and contractors on IR35 tax changes
The game is not yet up as far as the new IR35 rules in the public sector are concerned. Paul Mason, National Account Manager at Abbey Tax, discusses recent IR35 tax changes and what assistance is available for practitioners and their agency and contractor clients.
The legislation for the new IR35 rules in the public sector was published on Monday 20 March as part of the Finance Act – giving everyone 17 days to read, digest and make any plans before the changes came into force on the 6 April.
In truth, the market is still in a state of flux.
Public Sector Bodies
Now that it’s their decision to determine an engagement’s IR35 status, they are not sure how to go about it. Those that have tried the blanket ban on using contractors through Personal Service Companies (PSCs) are beginning to realise that contractors may consider other options leaving the delivery of projects and services at risk.
As an example of early advice given, one public sector body initially gave its contractors five options:
- Take a fixed term appointment (on PAYE);
- Apply for a permanent job in the role you were already engaged in (with no guarantee of success);
- Go PAYE as an agency worker;
- Go through an umbrella company; or
It soon became clear that many contractors were choosing option five and so a rethink was required and if your engagement was ‘critical to the business’, then the situation would be reviewed.
As one contractor said at the time: “If we’re not critical to the business, then why are we here?”
The MOD and the education sector seem to have taken a similar hard line and there was a recent announcement that there was a blanket ban on PSCs in the NHS – yet on the same day, I was told by an accountant that his doctors had been offered contracts that were outside of IR35.
The position is less than clear and it would seem that even the hard liners are realising that they will need to engage with this new process.
They will struggle to help if there aren’t the candidates available and will be keen to see as many contractors as possible operating outside of IR35, but they are also concerned about their liability as the fee-payer.
There are a number of issues for agencies. Firstly, ensuring that they establish exactly why the engagement has been deemed ‘caught by IR35’ or ‘not caught’. In reality, agencies will want to fully understand the ‘not caught’ decision because that allows them to pay the PSC gross. If the decision turns out to be incorrect, then the public sector body will be at fault, but could the agency be liable for the tax and NICs if it turns out that they didn’t have a complete understanding of the decision and failed to ask for full explanation, which the legislation gives them every right to do?
Secondly, as regards the flow of information: where there is only one agency in the chain, it is both the agency which can request further information about the engagement from the public sector and is the fee payer, as it is the agency closest to the PSC. But where there is more than one agency in the chain, there is a potential disconnect between the agency with the information and the agency responsible for making the correct payment.
Thirdly, if the engagement is caught, there is now a requirement for the agency to deduct Employers NIC from the rate payable to the contractor, as well as tax and employee’s NIC, and declare these amounts as part of its RTI submission. More work, more scope for errors and challenge by HMRC.
Fourthly, agencies will have to be careful what role that they play in advising in the decision-making. Yes, it is the public sector body’s decision and theirs alone, but for tax reasons, candidates will want to fall outside of IR35 and pressure from candidates may persuade agencies to argue the candidate’s case for being outside. Could that leave them exposed?
The other areas for liability will arise if the agency pays gross when it should not have or if there is fraud. It is hard to see an agency going against the public sector body’s decision and there seems to be no real incentive to acting fraudulently.
Many will be hit hard in their pocket and if public sector bodies don’t engage with the process properly; some unfairly so. They will want assistance in establishing that they do operate outside of IR35, although all they (and their agencies) can do is suggest and encourage the public sector body – there is no right of appeal against the public sector body’s decision.
There was an initial view that the answer to the problem of engagements being declared caught was to ask for a rate rise. But then it became evident that many public sector bodies work within framework agreements which only allow a certain amount to be paid for each level of resource. And that amount now also has to cater for the Employers NIC. There’s a double whammy for starters.
The third blow is that unlike a contractor operating in the private sector, there isn’t the cushion of the 5% general expenses allowance. So if an engagement is caught, then every penny received in income is either Tax/NICs or net pay. There is no profit or loss; so no profit against which to set off the running costs of the business, which includes their accountancy fees.
The legislation does provide for the deduction of materials used in the performance of the services (Such as? These are mainly knowledge-based workers); capital allowances, pension contributions and other expenses incurred by an employee and allowable in the course of their employment. The reality is that the individual will have to make a claim via their self assessment return at the end of the tax year, which will have cashflow implications.
Those with a handful of clients operating in the public sector may just have to accept that they will lose the income from clients who will soon realise that long term it will not be a viable option trading through a PSC if all engagements are caught by IR35.
Last but not least, practitioners with fee protection schemes should be targeting contractors: many fear retrospective action being taken if their engagement is caught by IR35 moving forward, but was not deemed to be caught previously. Your firm can provide them protection for the fees, we can insure their tax position if they are worried about the potential tax loss.
If you are concerned about any of the issues raised above, please call us on 0345 0660 035 or email firstname.lastname@example.org
About the author
Paul Mason worked in general practice before moving into the insurance and consultancy arena. He has worked with accountancy practices since 1991, and has had particular involvement with the contractor market since 2001.
Paul works within Abbey Tax’s Contractor Unit, which provides contract reviews and tax losses insurance for contractors/freelancers nationwide. Paul regularly speaks on IR35 – including the new public sector rules – and works closely with Abbey Tax’s investigations specialists in a team whose role is to ensure freelancers get the best defence in an IR35 enquiry.
About the company
Abbey Tax is the UK’s largest independent tax consultancy and adviser to the accountancy profession. With the reputation of delivering the highest service standards within the fee protection insurance market, Abbey Tax is the trusted partner for over 2,500 UK accountancy practices.
Abbey Tax and our sister division Accountax have been working hard in the background to look at insurance and consultancy solutions for practitioners and PSC clients alike.We have developed a tailored tax indemnity solution for agency clients worried about their liability as the fee payer. You can assist contractors concerned about proving to their public sector clients that they genuinely fall outside of IR35 via a comprehensive working practices review which we can undertake for each engagement.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.