As you may already be aware the Autumn Statement delivered a number of measures which effect the contracting sector including changes to IR35 and the VAT Flat Rate Scheme. The government has published a new policy document detailing the changes to IR35 and off-payroll working rules for public sector workers. View document here.

The Changes

PSC or “Limited Company” Contractors operating in the public sector will no longer get a say on whether or not the IR35 ‘intermediaries’ legislation’ applies to them. Consequently if they chose to continue being paid via their limited company, the contractor’s intermediary (Agency / Public sector body) will have to agree to deduct the appropriate TAX and National insurance as the ‘fee payer’.

Due to the changes made to the flat rate VAT scheme and the removal of the 5% expense allowance in the public sector, operating through a PSC will no longer be as cost effective. Many leading industry experts advise contractors operating within the public sector to migrate over to an Umbrella solution and either shut down the limited company or put it into dormancy for private sector work. As well as contractors being able to achieve a higher take home via an umbrella solution, they will also receive full employment rights & have all insurances covered via the umbrella company.

Why are the Rules Changing?

The government estimates that this measure will affect around 26,000 PSCs although some experts believe that this figure is conservative. They have stated that these changes will make the tax system fairer for everybody. The IR35 rules aim to tackle what the government calls ‘disguised employment’.  They expect the above changes will make non-compliance that much harder resulting in more cash for the Treasury.

Key facts

• Takes effect from 6^th April 2017
• Public Sector Employer will be responsible for determining if the assignment will be inside or outside of IR35 legislation
• The organisation paying the limited company (also known as the ‘fee payer’) will be liable if an assignment is wrongly determined to be outside IR35
• The Public Sector Employer has 31 days to reply to a request from an agency about the status of roles
• The fee payer must pay over tax and NI via RTI
• Umbrella.co.uk can help!

Impact for contractors & agencies

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’.

Many agencies are currently looking at the guidance given and wondering whether or not the Public Sector Bodies they supply will actually send out a communication to confirm statuses of roles or whether they need to chase. No agency wants to be the first to implement the changes and risk losing any contractors so the market trend currently is, wait and see. This will mean a quick shift once communication comes out so it is important that agencies understand the options available. Agencies will also be in the process of identifying the relevant person at the public sector body so that they can apply the 31 day rule when the time comes if necessary.

We have already seen one major public sector body determine that all roles are inside IR35 and setting workers/agency partners a deadline as early as mid-February to change their pay status if they wish to continue contracting in roles post April.

In the medical sector hospitals/trusts are starting to ask agencies which contractors they currently have that are operating through a limited company, with the inevitable conclusion coming back that all roles are inside IR35.

The Policy document acknowledges a ‘behavioural response’ that will result in many contractors ceasing to operate as a PSC and switch to other payroll vehicles such as an umbrella solution.

What action should contractors take?

Firstly, wait for the Public Sector Body to determine the status of your assignment and then speak to your accountant. For those contractors whose roles are deemed to be inside IR35, operating through a PSC will more than likely no longer be the best option. Switching to an umbrella solution for example would mean that contractors paid the same tax and NI contributions as under a PSC arrangement, but would also get access to employment benefits such as holiday pay, sick pay and pension schemes. Other advantages are that contractors no longer have the extra cost of company insurances, accountancy fees, business bank fees etc.  

If you are recruiting for the Public Sector and are unsure how this will affect you and your contractors, please get in touch today. Call Dexter on 01625 544679/07825 605407, visit www.umbrella.co.uk or email dexter@umbrella.co.uk.