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IR35 Rules for private and public sector contractors

IR35 Rules for private and public sector contractors

In our previous article on IR35 we covered key topics such as what is IR35, how to know if IR35 applies to your contract, the different options for payment if you find yourself working under IR35 legislation and penalties that are imposed if you are caught out by IR35.

 

As a recap, IR35 affects all contractors working through an intermediary who do not meet HMRC’s definition of ‘self employment’ and are therefore not paying the correct amount of tax or national insurance.

 

Recently HMRC has put increasing pressure on the public sector to help enforce these rules by shifting responsibility for determining the status of worker to the client (public authority), rather than the contractor. However, it’s also important to be aware that these changes will likely affect the private sector in the near future as the Chancellor announced in the Autumn Budget that there will be a consultation into off-payroll working in the private sector due in early 2018.

 

Many contractors affected by these reforms will now be asking – How do I make sure my contract stays compliant and what options do I have if my contract is affected? Read on for the answer to this question and to find out how the IR35 rules affect both public and private sectors in more detail.

 

How can I make sure my private sector contract doesn’t fall foul of IR35?

 

The IR35 summary checklist below will help to identify whether or not IR35 rules apply to your contract. The following three guiding principles remain the same across all sectors, industries, and contracts. If you can demonstrate that any of these three principles do not apply to your contract, then you should not be affected by IR35.

 

However we recommend that you consult with an IR35 specialist in order to get a more detailed assessment on your IR35 status.

 

Control

What degree of control does your client have over what, how, when, and where you complete the work? As a contractor, you will typically work to a detailed job specification or brief, outlining the services to be provided, where they will be provided, and when, specifically, they will be provided.

 

Substitution

Are you required to carry out the work yourself or can you send someone else in your place? If you have to provide your services personally, this will usually signal that you are an employee rather than a contractor, the latter of which could send out a substitute to complete the work on their behalf or reassign the work.

 

Mutuality of Obligation

Is your client obliged to offer you work during the contract, and are you obliged to accept it? To be classed as a contractor, you must work project to project, with no obligation to carry on working for the client once the initial task has been completed. You will also have the right to terminate the project part way through.

 

IR35 rules for the public sector from April 2017

 

As part of the crackdown on IR35, in April 2017 the UK Government acted to address the issue even further in the public sector. They did this by shifting the responsibility of determining whether or not a contractor is caught by IR35 away from the contractor and onto the public body that engages them.

 

In order to help these public bodies determine a contractor’s status, an online assessment tool was issued to government departments. This tool focused not on the terms of the contract, but on the actual working behaviours of the contractors themselves.

 

The public body bodies were also made responsible for ensuring that any tax and NI contributions owed were deducted (meaning the clients now had the right to demand evidence of a contractors tax payments which in turn can be a confidentiality/ data protection issue).

 

What was the impact of the IR35 public sector changes?

 

In practice, post April 2017, most public sector departments erred on the side of caution and chose to issue broad guidance that all their contractors were subject to IR35. In the initial confusion this caused, many contractors believed that they could no longer use their limited company and chose to move to an umbrella company instead.

 

While limited companies are actually still a viable method of getting paid for these contractors, the fact that they no longer offered extensive financial benefits meant that they lost some of their initial appeal.

 

However, the financial impact of moving to an umbrella company and therefore paying both employees and employers national insurance meant that thousands of contractors were left worse off following the introduction of the changes.

 

How to get paid if you are a public sector contractor

 

The IR35 changes have had a profound effect on how many public sector contractors are now paid.

 

In effect, the changes have meant the following:

 

  1. Client determines contractor is within IR35
  2. Client pays a contractor £X for one day’s work
  3. Contractor processes 100% of £X through PAYE via an umbrella or limited company.
  4. Contractor pays employer & employee national insurance contributions, income tax and any processing fee.

 

IR35: Your Next Steps

 

Public Sector

If you are a limited company contractor in the public sector, then it’s highly likely that you have already been or soon will be affected by the changes in IR35 legislation. Whilst you can always consider moving to full employment rather than continuing contracting, you will need to think about losing the many benefits that come hand in hand with becoming a contractor.

 

There are personal and financial considerations to make here due to the significant administrative and financial costs of running a limited company and tax increases to be aware of, but also the impact on any freedoms you may enjoy. If you opt to remain a contractor, you will need to decide how to process your payroll.

 

The common choice here is to work through an umbrella company of which there are many, so shopping around for the best deal is a must and Contracting Scout can help you look at your options.

 

Private Sector

In the Autumn Budget 2017, the UK Government confirmed it is preparing to consult on whether or not to roll out the same IR35 public sector reforms to the private sector

 

In view of this, your first step is to review your current contract and, if necessary, amend the terms and conditions to ensure it does not fall foul of IR35 – ahead of any changes the UK Government might impose in the future.

 

In the event that you are unable to change the details of your contract and you don’t want to be caught by IR35, you may need to seek out a new client. When negotiating your next contract you might want to consider your working practices in line with the Government’s IR35 tool to see if you will be affected should the proposals come to fruition.

 

Alternatively you may choose to switch to an umbrella company, giving yourself time to prepare for the changes rather than make a hasty move when the time comes.

 

For further information about IR35 compliance and how these changes could affect you, or for an independent IR35 review, please get in touch for a free, no obligation 10 minute consultation.

Get in touch for a free, no obligation 10 minute consultation.

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