New IR35 rules: What you need to know
The government has published a new policy document detailing the changes to IR35 and off-payroll working rules for public sector contractors.
Although there weren’t any major shocks in the changes, which come into effect for personal service company (PSC) contractors next April, we thought it beneficial to publish a full preview of the rules so that customers can start to prepare for the changes.
If you are unsure about any of the changes and what impact they will have on your personal situation then please don’t hesitate to contact our accounts team. They can help explain the rules and may be able to help you switch to a more tax-efficient income structure.
Get in touch for more information. Call: 0800 121 6513
Who the policy changes affect
- PSC contractors working in the public sector
- Public sector organisations
- Agencies supplying PSC staff to the public sector
As expected, the policy paper confirms that responsibility for determining a public sector PSC contractor’s ‘IR35 status’ will move from the contractor to the public sector body or staffing agency.
PSC contractors operating in the public sector will no longer get a say on whether or not the IR35 ‘intermediaries legislation’ applies to them. Consequently, many contractors will receive less take home pay.
The policy document also confirms that the organisation engaging the contractor (public sector body of agency) will become responsible for deducting and paying employment taxes and National Insurance contributions (NICs) to the tax authority.
For tax and Class 1 NICs purposes, the body will be treated as an employer. Importantly though, they will not have to provide employment rights such as holiday or sick pay.
The five per cent allowance currently offered to those applying the IR35 rules will also be withdrawn for public sector contractors because this administrative responsibility shifts to the engager.
Why are the rules changing?
The government says that these changes will make the tax system fairer for everybody. The IR35 rules aim to tackle what the government calls ‘disguised employment.’
They say that the above changes will make non-compliance with these rules harder resulting in more cash for the treasury.
Impact for contractors
It is difficult to say how the rules will be applied generally, but there is a consensus that many more public sector PSC contractors will be deemed to be ‘inside IR35’.
The government estimates that this measure will affect around 26,000 personal service companies, although some experts believe that this figure is conservative.
The policy document acknowledges a ‘behavioural response’ that will result in many contractors ceasing to operate as a PSC or in the public sector (see Umbrella.co.uk’s guidance below).
Impact for the public sector
The government’s policy document acknowledges that there will be “a significant initial impact on public sector organisation who engage off-payroll workers ad agencies supplying workers in the public sector.”
However, the government views this impact in quite narrow terms. They see the impact primarily in terms of the extra administrative burden that the public sector organisations will have to undertake.
But they ignore the indication that many contractors will increase their prices or shift away from the public sector as a result of the changes. Under these circumstances the public sector body would face higher costs and may struggle to recruit the best talent.
Impact for agencies
The impact for agencies may be smaller than initially thought because it seems as though the IR35 decision will rest with the public sector organisation rather than the agency where there is an agency involved.
The government anticipates that smaller agencies will struggle more than larger agencies because smaller agencies may struggle to place workers on payroll.
What action should contractors take?
While the outlook appears bleak for public sector PSC contractors there are some steps that you can take to minimise the impact of the changes.
- It may be possible for some public sector contractors to move to private sector work. However, some experts predict that these changes will eventually be carried over to the private sector so the benefits may only be temporary.
- It may also be possible to renegotiate your terms with the public sector body and increase your prices to reflect the lost take home pay.
- For some contractors, operating through a personal service company may no longer be the best option after April. Switching to an umbrella scheme, for example, would mean that contractors paid the same tax and NICs as under a PSC arrangement, but would also get access to employment benefits such as holiday pay, sick pay and pension schemes.
For more information on the changes, or what you can do to mitigate their impact, please contact a member of the
Umbrella.co.uk account team and we will be happy to help. Call 0800 121 6513.