The 2017/18 tax year sees major changes to all public sector contractors working under IR35 legislation. From 6 April, intermediaries such as personal service companies are no longer be able to determine whether the legislation applies to the contractor.
The duty is now on the public sector body or third party organisation responsible for paying the contractor. What will this change mean for your business, and your tax position?
The old rules
Up until the 6 April it was the job of the intermediary to decide whether IR35 was applicable to individual contracts. The personal service company or other intermediary would then calculate the tax and national insurance owed to HMRC and pay it themselves.
If you’re a contractor working with a public sector organisation, this is all changing.
We first learned of the government’s intention to make changes to IR35 liability in the 2016 Budget statement when the chancellor (then George Osborne) announced that “public sector organisations will have a new duty to ensure that those working for them pay the correct tax”.
In essence, this meant that all public sector bodies with off-payroll workers would assume responsibility for applying IR35 and paying the correct amount of tax.
Following a 12-week consultation, the current chancellor Philip Hammond confirmed in Autumn Statement 2016 that all public sector organisations or agencies paying off-payroll workers will be required to deduct income tax and national insurance if they deem the worker within IR35.
All public sector organisations are now required to assess the contractor’s IR35 status and then act accordingly.
What is a public sector organisation?
The Freedom of Information Act 2000 explains which bodies legally fall within the public sector. Contractors working with any of the following organisations will no longer have their IR35 status determined by their intermediary:
- government departments
- emergency services
- the NHS
- local authorities
- the BBC and Channel 4
- educational institutions including universities.
What does this mean for my tax position?
The changes will mean that many contractors working with the public sector may become treated as a company employee for tax purposes. Contractors will continue to operate through their intermediary but the fees will be deducted at source.
Larger tax bills are a possibility for contractors who will now be brought within national insurance and PAYE. In addition to this, public sector contractors deemed as being within IR35 by their client will no longer have access to the 5% corporate tax allowance put in place to help them with the administrative costs of complying with IR35.
Are you a public sector contractor? Unsure about how these changes will affect the way you do business? Concerned about the prospect of rising tax bills?