Public sector contractors Articles

Umbrella or PSC: What’s better for public sector contractors?

It’s a question that many limited company contractors will be asking in the coming months as impending changes threaten some of the biggest financial advantages that come along with limited company status.

For public sector contractors operating through personal service companies (PSCs) the changes could prove catastrophic.

The big shift concerns the IR35 status of public sector contractors – specifically, who judges a contractor’s IR35 status. From April, the responsibility for judging IR35 status will pass from the individual contractor to the hiring public sector body or agency charged with recruitment.

As a result, more contractors will be ‘caught out’ by the IR35 rules. Anyone ‘caught out’ by the changes will be reclassified by HMRC as being in ‘disguised employment.’ This means they will be taxed as if they were regular employees.

Following last week’s Autumn Statement the government’s position on public sector IR35 reform is clear. But Britain’s judges could block the plans if they are shown to contradict employment law.

Set to be introduced in April 2017, the public sector IR35 reforms will lead to many public sector contractors losing some of their take home pay and the changes could have some nasty unintended consequences for public services too.
 

Public Sector Contractors: Top tips for avoiding IR35
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From April, contractors working in the public sector will lose the right to determine their own IR35 status. As a consequence, thousands of PSC contractors could see their take home pay reduced.

In many cases it is feared that the legitimate contractors will be caught out by the reforms and unfairly end up on inside-IR35 contract and paying a heavy price for it.

There are, however, some ways that contractors can try to avoid IR35 and, if inevitable, mitigate the impact of an imposed inside-IR35 contract.

Public sector contractors despair at off-payroll IR35 consultation

If the reforms go ahead, then public sector bodies and agencies would be responsible for deciding whether a contractor qualifies for IR35 restrictions. This differs from the current system where intermediaries like individual limited companies (commonly known as personal service companies) or umbrella companies decide IR35 status.

Experts believe that this will result in more public sector contractors being ‘caught out’ by IR35 legislation. Some fear that even the most independent contractors are at risk of paying more tax because of difficulties proving the absence of IR35.