In the Autumn Statement of 2016 the government confirmed that it would introduce new measures into the intermediaries’ legislation (IR35) with effect from April 2017.
The most significant measure being a shift of responsibility for determining the status of an engagement, assignment or contract in the public sector from the worker to the client, where a Personal Service Company (PSC) is involved. Under the new measures, the public authority (end-client) will be responsible for determining the status of a contract and whether the new off-payroll legislation should apply.
Where it is determined that the new IR35 rules apply, the “fee-payer” (public authority, agency, or third party) that makes payment to a PSC becomes responsible for deducting and paying associated employment taxes and National Insurance contributions.
This could have significant impact on contractors using a PSC to provide services to a public sector organisation (such as an NHS Trust, government bodies), either directly or through an intermediary (such as a recruitment agency).
The new rules only apply to public sector assignments, so private sector assignments are unaffected and only the existing IR35 rules apply.
What is changing?
- The Director of a PSC will no longer be responsible for deciding whether an engagement is inside or outside IR35 when the end client is a public body;
- HMRC is developing a new online tool to determine the status of engagements which is set to replace the current employment status indicator tool;
- If there is an intermediary who pays the PSC, the public body must inform them of their IR35 assessment;
- If the engagement is assessed to be outside IR35 then the director can continue to operate as normal and decide how best to structure his PSC’s finances;
- If the engagement is assessed to be inside IR35 (“deemed employment”) then the party paying the PSC must deduct PAYE and employees NIC from the invoice value, net of VAT, and pay this together with employers’ NIC to HMRC
- The PSC receives the net invoiced amount from the fee-payer; and
- The Director, in his personal capacity, will receive credits against the tax that has already been deducted.
How will it affect contracting to the public sector?
HMRC will provide a more practical tool that public bodies can use to aid them in their decision making. We expect this tool to be similar to HMRC’s previous guidance on employment status.
If this is the case then most contractors will be considered by the public sector organisation to be caught by IR35, and therefore National Insurance and PAYE on the invoice value must be deducted from the PSC. The contractor effectively receives a significantly reduced net payment, equivalent to that of a PAYE employee, but is not entitled to any employment or statutory rights from the fee-payer. Furthermore, that contractor will continue to bear the cost and administrative responsibilities of operating their own limited company.
How will this affect recruitment agencies operating within the public sector?
Such agencies should anticipate an increase in administration efforts as a result of the additional calculations, deductions, payments and reporting requirements of all “deemed employment” payments. This will result in a shift of agency resources from their core activity of placing workers to a non-core activity of payroll.
Agencies should also prepare for a direct increase in costs as Employers NI and Apprenticeship Levy will also now be due on such payments. How agencies choose to finance such costs should be carefully considered. One option to avoid such costs is discussed below.
What solutions can we offer?
In cases where contractors only operate within the public sector, ESCG can offer a solution suited to both workers and clients – partner with a well-established Umbrella company. More information on what it means to be a well-established Umbrella company is outlined in a previous article: Sustainable Decision Making.
While an Umbrella company may not provide contractors with the same level of take home pay they are used to, it will provide full employee and statutory rights as well as an employee benefit scheme, helping them to save up to £1000 per year.
Some additional benefits for both the contractor and agencies also include:
- More cost effective than an Accountants Service
- Little or no administration when compared to a Limited Company
- Employers Liability, Public Liability and Professional Indemnity insurance is included at no additional cost
- Consistency of pay, with no third parties making deductions to invoices
- Reduced end-client assistance as no IR35 assessment required
- Agencies only need to make one single payment for all contractors, as opposed to individual payments for each limited company
- Simplified RTI
- No joining or leaving fees
- Same day registration meaning no delays in payment
If you or your business is to be affected by the new changes, take the time to digest the above information and give us a call to discuss the best solutions appropriate to you.
HMRC guidance on the new measure can be found here :