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    Default What's changed - FAQ

    Introduction

    Back in the 2016 Budget it was announced that the means by which IR35 would be handled in the public sector was going to change to ensure greater compliance. This means the following:-
    • The person responsible for making the determination of whether someone is inside or outside IR35 is now the public sector agency / department.
    • Contractors caught by IR35 in the public sector will only receive payments net of tax.
    • As you are inside IR35 you can no longer claim travel and subsistence expenses.

    Is my client caught by these rules

    The definition of what is or is not a public sector client is based on the Freedom of Information Act. This means that if the organisation is covered by that act they have to apply the Public Sector IR35 others, if not mentioned in the Act they do not.

    Hence Universities (technically not part of the Government) are covered by the rules, RBS (although 80% owned by the Government) is excluded from the rules.

    Working through a Consultancy

    Depending on what services a consultancy is providing to a public sector department and how those services are being provided - you may or not be caught inside the rules - see http://www.contractoruk.com/news/001...re_caught.html

    I will add that the thing to remember is that the law has been written not to catch people and companies but to stop departments creating false "consultancies" to get round the rules.

    Yes, the rules have the side effect of catching people supplied through consultancies but I believe that is the purpose is to ensure the obvious tricks a department could use to get round the rules can't be used.
    Note - this is currently a work in progress. I will be adding to it and comments are welcome (just PM me)
    Last edited by eek; 4th March 2017 at 22:18.
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    What's Changed.

    The big change is that the person who is determining if your contract is or is not inside IR35 is no longer you the contractor but the Public sector department / agency you are working for. IR35 determinations have to be made within 31 days of the contract beginning otherwise the tax due becomes the responsibility of that department not other parties in the chain. This restricted time scale will mean that many departments have no choice but to decide on a blanket decision that everyone is inside IR35 when this begins April 2017.

    ESS - The actual decision making tool.

    To facilitate the change and allow a public sector department to make an accurate decision HMRC have created a online tool that allows people to determine IR35 status called ESS. The tool was launched on March 2nd and can be found at https://www.tax.service.gov.uk/check...-for-tax/setup.

    Our discussions regarding it can be found from http://forums.contractoruk.com/publi...ml#post2381206 and http://forums.contractoruk.com/publi...te-sector.html.

    The biggest issues are discussed at http://forums.contractoruk.com/publi...ir35-tool.html

    Blanket Decisions.

    Because of the late arrival of the ESS tool (still in beta as I write this in March 2017) many departments will have little choice but to blanket decisions that everyone is inside IR35 -TFL is a prime early example of this.

    While blanket decisions are not how the system is supposed to work, given that this IR35 change is a highly political issue its hardly surprising some departments may adopt a standard policy that everyone is inside.

    I've got a new contract but the agency doesn't know if its inside or outside?

    Chase the agency to get a determination but assume its inside until they confirm as a contract term that its outside - so were the contract found to be inside IR35 ad you wanted to leave - you would be able to.

    As was shown last year in a separate case agencies may try to argue that the change in tax terms is not a material change in contract terms and try to force you to remain in that contract.
    Last edited by eek; 3rd March 2017 at 21:20.
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    Tax

    The other significant change with these new rules is the way tax is collected.

    Under the new IR35 payments to via a Personal Service Company are net of tax. This means:-

    Employers NI will be deducted from the amount the agency is paying you and the agency will pay that directly to HMRC.

    Employees NI and income tax will be withheld from the payment and the agency will forward that to HMRC on your behalf.

    The amount your company receives (excluding the VAT part) is therefore net of tax and should be paid directly to you from your company.

    You are also being taxed as if you were an employee with your income extrapolated to an annual figure (if weekly this payment x52, if monthly this payment x12) and tax deducted based on that total - resulting in something like this (for a weekly payment).
    5 days @ 300 per day ....... 1500
    Employers NI ................ 163
    Gross Income ................ 1337
    Tax Free Personal Allowance . 211.54
    Taxable pay.................. 1125.50
    Income tax (withheld) ....... 327.12
    Employees NI (withheld) ..... _ 90.83
    Total Deducted (withheld) ... 417.95
    Take home ................... 919.05


    Any issues with the amount received will have to be processed via self assessment at the end of the tax year.

    Corporation Tax

    As all income from a contract inside ir35 will be paid to you as income, net of income tax, your company will generate no profit from the contract. As corporation tax is only paid on company profits (i.e. sales minus costs) and income is a cost - the company makes no profit on a contract inside ir35 hence no corporation tax is due (on contracts inside the Public Sector IR35 rules).

    Dividends

    As all the company income is now being paid to you as taxed salary you cannot use Dividends to split the income from this contract between you and other shareholders.

    There is also no need, the none VAT portion of the money received from the agency can be paid directly into your bank account.

    Salary / Child Benefit / Personal Allowances

    All your income from this contract is now coming to you as salary and you can no longer use Dividends to split income between you and other shareholders. This means that its likely your income will be far higher than it was before.

    If your income exceeds 50,000 you will need to stop claiming or repay any Child Benefit payments. See https://www.moneyadviceservice.org.u...60000-per-year

    If your income exceeds 100,000 your personal allowance starts to be clawed back at the rate of 1 for every 2 of income.

    Pensions

    If you are contributing large amounts into a pension your pension contributions will be from your post salary income not direct from your company. That means that all contributions are going to be 15-25% smaller due to National Insurance being deducted prior to it being paid into your pension. If you pay a lot into a pension you need to seriously decide on whether it would be better to use an umbrella company and pay into your pension using Salary Sacrifice. See http://forums.contractoruk.com/umbre...ributions.html for a detail explanation

    You will also have to use self assessment to reclaim the higher rate income tax proportion of any pension contributions see https://www.aegon.co.uk/support/faq/...ef-pp-faq.html for some details

    Expenses

    The travel and subsistence changes introduced in April 2016 mean that anyone inside IR35 cannot claim travel and subsistence allowances.

    Yes this does mean that the contract 70+ miles from home is no longer practical.

    Also be very careful if your end client is offering to cover expense costs see http://forums.contractoruk.com/accou...ere-start.html

    Accountancy costs / IR35 previous 5% costs rule

    The 5% allowance that IR35 previously allowed for things such as accountancy costs is not applicable to the public sector. These will have to be paid out of company reserves and your company will be making a loss until the company once again starts taking work on that is outside IR35.
    Last edited by eek; 16th March 2017 at 11:25.
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    Employment Options

    In TfL's infamous December memo they listed the following options:-
    1. Working on the payroll of the agency
    2. Working via an umbrella company
    3. Convert to an employee (its worth noting that TfL mentioned both recruitment and headcount as reasons why this isn't likely to happen)
    4. Stop working for the public sector
    5. Proof that you are critical to TfL may allow you to continue working via a limited company

    It's worth noticing that they really don't like option 3 (i.e. they don't want the issues of increased head count) and they want to be the people deciding if a limited company is appropriate or not. Now 5 follows the rules as they are now set out (The public sector manager runs the test and makes the decision) but it does imply that TfL really don't want people working that way and that this is politically motivated.

    Now let's run through the options (note how low down the list continuing to use a limited company)

    Payroll via Agency

    This is the ideal approach as it means you will receive the most money via PAYE. Sadly few agencies operate payroll for their contracted workers as its a lot of additional work for little benefit (especially when umbrella companies provide incentives for agencies to refer contractors to them.

    Join an Umbrella

    Umbrella companies have been around for a long time and people on the CUK forum have recommended them for years to those wanting to try contracting but unsure if they will do it long term.

    From All Umbrella's are equal "Umbrella companies will meet all Statutory Employer obligations and will deduct PAYE taxes from its employees. Employer's NI will be paid to HMRC with the PAYE deductions from employees and reported to HMRC via RTI. The umbrella company will retain nothing from the contract value, for its own gain, other than a stated margin."

    The advantage of an umbrella company is that while they charge a smallish weekly or monthly fee (before all other taxes are deducted) they do know how contracting works and picked correctly they will provide a hassle free way to continue working. Included in the fee will also be the liability insurances you previously had to pay.

    As a quick example Contractor Umbrella charges 29.50 a week for their services (taking from the total amount before they start deducting tax). The impact on the 300 a day weekly payment highlighted above is a reduction from 919.05 to 903.24 (so less than 16 a week).

    Ideally you need an umbrella you can work with so pick a few (either from the agency's preferred list or from the list of agencies that all umbrella are equal provides and call them.

    Ask how contracting works, ask how they work, how quickly they pay and anything else they can do. If you care about pensions ask them if they support the use of salary sacrifice for pension payments and whether that pension payment can be made directly into your existing pension plan.

    Using the umbrella you want

    While your agency will have a list of recommended agencies its no more difficult to pay an umbrella company than to pay your limited company directly. If you find an umbrella you like and the agency doesn't use them ask many agencies will allow you to use the umbrella you want (and if they don't will probably give you reasons why you shouldn't be using that "umbrella" full stop).


    Convert to an employee

    Mentioned here as its in TfL's list above. The important thing to emphasis here is that there are probably political reasons why the contract was not permanent to begin with so its highly unlikely that the department will accept you as an employee and there is even less chance they will accept you as an employee at your current level of pay (which is probably higher than most staff including a lot of senior management).

    That is not to say that this is not an option but you will probably have to go via a employment tribunal to win the point (see the tribunal section below).

    Continue using your limited company

    This may still be doable but in the same way that agencies don't want to put contractors on their payroll they are unlikely to actually want the hassle of withholding tax for them and paying it to HMRC.... As such going forward I suspect a lot of agencies will not support or allow the use of a limited company for public sector contracts inside IR35.
    Last edited by eek; 29th January 2017 at 12:49.
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    Appeals

    Appealing the inside IR35 decision
    On the tax side of things, the first thing to point out here is that compared to how IR35 previously worked, the situation is reversed. HMRC will no longer be suing you for tax due under IR35, instead you will have to appeal the decision that you are inside IR35. As of January 2017 we currently don't know how that will work.

    Worse a lot of the money you would be trying to reclaim (employers NI) will be from an agency who
    1. has already paid that money to HMRC
    2. are unlikely to receive enough in margin to make up the difference (Employers NI is 13.8% of salary, TfL's margin for payroll - as an example is supposedly 0.9%).
    3. are not responsible for the decision that you are inside IR35 they are merely following the directives of their client

    Hence I suspect appeals will result in instant termination by the agency. This is also why I suspect most agencies will not allow you to use a limited company for these contractors (see the employment options section above).

    Agency worker Regulations

    You may be able to use the Agency Worker Regulations to ensure that after 12 weeks you get the same pay and benefits as permanent members of staff. While its likely that pushing for equal pay may not get you anywhere benefits including paid holidays may be worth pursuing.



    Employment Tribunals

    The other approach would be to seek Employee or Workers rights via an Employment Tribunal. - More details will follow later...
    Last edited by eek; 24th January 2017 at 15:55.
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    Retrospective Claims

    Note This is subject to debate as to how likely it is that HMRC will do this. Treat this as a warning

    If you are in a contract that started prior to April 2017 and continued past April 2017 its likely that the contract you were in which was once outside IR35, may be regarded as inside IR35 come April. It is possible (some people suspect highly likely) that HMRC may decide to investigate some or all of those cases on the assumption that if the client regarded the contract inside IR35 come April 2017 its likely the client regards the status of the contract prior to April 2017 as inside or at least dubious before then.

    Edit to add - someone has suggested that keeping the same contract and switching to an umbrella may be enough. Given that the agency reporting requirements use NI numbers for reporting I'm not sure that would be enough. I think to be truly safe you need to ensure the agency is no longer reporting your NI number on their returns.

    As such my personal recommendation would be (depending on how long you've been in the current role) to leave your current contract before March 2017 and ensure you receive all payments before the end of the tax year (April 5th 2017).
    Last edited by eek; 23rd January 2017 at 08:13.
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    Responsibilities / Liabilities

    Posted for Agencies who still can't find decent advice
    The responsibility / liability for determination who is inside and outside IR35 is with the Public Sector client. They have 31 days from the start of the contract to make a determination otherwise all tax is the responsibility o the public sector client.

    The liability for deducting tax from the payment is with the payer. This is the company who pays the contractor via their limited company (so most of the time that is the agency).
    Last edited by eek; 29th January 2017 at 12:43.
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    Reserved 2 (text here is now in the first post).
    Last edited by eek; 11th February 2017 at 19:22.
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