Tax changes due to take effect on April 6 could see the loss of talented public-sector contractors to the private sector in search of more favourable terms. It is set to affect thousands of public-sector contractors such as medical specialists, social workers and interim managers. Who currently receive payments via their own LTD Company
“Where a public sector body engages a worker through a chain of agencies, or other third parties in a chain, the party closest to the worker’s limited company in the supply chain will be required to comply with the rules.” – HM Revenue & Customs – Technical Note – 16th March 2016.
The changes will mean a shift in the responsibility for calculating the correct level of National Insurance from individual self-employed contractors working through a limited company to employers and agencies. Not only will this shift responsibility but if a contractor’s work falls within scope of IR35, they will be taxed as an employee without the same rights such as auto-enrolment for pension contributions or annual leave entitlement – leaving them worse-off. Employers and agencies will be offered an online tool which will. help them decide if your assignment falls within scope of the IR35 legislation. However, the tool is yet to be made widely available by HMRC who have only published a beta tool.
Without the release of the online tool to-date and the changeover date edging ever closer, it is likely to cause a headache for HR departments who will likely have to process last minute calculations. Work that is paid for on or after 6 April 2017 will be subject to the new rules and so for those who have 30-day payment terms, this will mean any necessary compliance checks will have had to be completed by 6 March 2017. As a contractor this could mean your calculations and therefore payments are incorrect.
One of the major concerns expressed by respondents to the Discussion Document (17th July 2015) was that any change to the IR35 legislation might “…result in an increased administrative burden on businesses, increasing costs and that it would likely result in over-compliance…”
With little time to understand the new rules, we could see employers and agencies using a blanket approach, deeming all contractors who work within the Public Sector to be in scope of IR35 to be on the safe side.
A 2016 survey conducted by the Recruitment and Employment Confederation found that 70% of public sector employers thought the changes to IR35 would increase their wage bill and damage their ability to attract senior contractors and interims. Many contractors are choosing to leave the public sector which could lead to a dearth of skills across key services such as Education, Healthcare or Social Care, or increasing their rates to counter the additional taxation they will now be liable for As a result, we are seeing the skills shortage worsen and an increase on financial pressures on the already stretched public sector.
Whilst there are many campaigning and petitioning to stop its introduction, this change is coming. HMRC has estimated that the changes will provide £265m extra income in the year to April 2018.
If you are concerned that you will fall within IR35, then the use of an umbrella company could be a solution for you. By using an umbrella company, IR35 will never be an issue because umbrella companies will treat all income as taxable, paying you as an employee from the outset, and protecting you from HMRC changes to IR35 legislation.
If you are still struggling to understand which option is right for you or would like to discuss the impact the new IR35 legislation may have on you, get in touch – we are always happy to help you whether you work with us or not.