You may be already aware of the changes to the implementation of IR35 legislation which take effect on 6th April 2017 for the contractors working for Public Sector clients. (This does not impact contractors working for Private sector clients)
We are writing to give an overview of the legislation and steps that need to be considered.
What is IR35?
IR35 (also called intermediaries legislation) is tax legislation that is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC).
What is the Difference between Inside IR35 (caught by IR35) and Outside IR35 (not caught by IR35)
This is still a complex area. Lot of ambiguity and confusion still exists in this area. In simple words, if you have the same benefits, responsibilities and control as a permanent employee, then you would more than likely be classed as inside IR35 (caught by IR35). If vice versa you are outside IR35.
What is changing from 6th April 2017?
The responsibility for deciding IR35 in/out shifts to the “end” Public sector client rather than yourself (i.e contractor). Public sector clients can use IR35 digital tool (Also known as Employment Status Service tool -ESST) to assist them and determine correct IR35 status. This tool is not yet available. End client need to communicate this to your agency and agency must communicate this to you.
What will happen if I am Inside IR35 (caught by IR35)?
Agency or Public sector client needs,
- Calculate the deemed direct payment in respect of your services
- Deduct Income Tax and National Insurance contributions (NICs)
- Report and pay those deductions over to HMRC
- Need to pay the company’s invoice after accounting for Income Tax and NICs deductions.
- VAT may also be payable if the company is VAT-registered. (No clear guidance on what will happen to flat rate scheme)
You need to
- Either choose to withdraw the money as salary (without paying extra tax) or
- Dividends (You need to pay corporation tax but no Dividend tax) if you want to carry forward profits
- Remove any other employees or shareholders in the company
What are other options if you decide to stay in Public sector if you are inside IR35?
- Use your own company
- Use umbrella company
- Become a Permanent Employee
- Signed fixed term contract (same as option 3)
Option 1: Use your own company
- Try weather your public-sector client will be happy to have IR35 assessment through Qdos (some contractors working for TFL were offered this choice)
- Ensure you move from Monthly invoice to daily or weekly. If you are monthly, you need to ensure you receive all payment relating to March by April 5th. If you receive after you will be deducted for tax.
- As per IPSE, you must request for a completely new, properly worded new contract to be in force from 6th April 2017. Not merely an extension of your current contract or a side-letter changing the current contract.
- If you decide to keep the same company, you must segregate past outside IR35 income and future inside IR35 income.
Option 2: Use PAYE umbrella company
- Compare the fee with accountancy fee
- Ensure its paid as Salary and not as Loans or any other off-shore schemes (you might have issues in future)
- Understand the payment terms (weekly/monthly)
- Check whether they have sufficient Insurance protection
- Speak to friends and agency and identify well recommended umbrella companies
- Understand the time frame to move to umbrella company (Contract, set up etc)
Please note net amount you receive from the client either to your company or umbrella company will be same. However Umbrella company or agency can tweak the daily rate to compensate for “Employers NI”.
Option 3 and 4: Become a Permanent Employee Signed fixed term contract
- Negotiate a good salary
- Negotiate a good benefits package (Pensions etc)
- Negotiate your terms and notice period
- Aim to be higher in the career ladder
How can we help?
- If you decide with Option 1 – Please let us know so that we can make necessary changes. We will take care of all tax related submissions to HMRC
- If you decide with Option 2, 3 or 4 – you can either wind up your company or make it dormant, again we will be able to assist