Working in the public sector? An FAQ about IR35

[malvolio]

I have never worked an IR35 contract however it does now look likely that I will. One question i have that I have not been able to find an answer to is.

If my contract is IR35 do i still need an accountant and if so what for?

Probably not, if you aren't using YourCo any more, although you may need one to cover off your next year end. However if YourCo continues to operate - even without any income for a while - it will still need to be serviced.

Also, it's affected by how you are getting paid. If it's net of taxes then probably not. If it's gross to YourCo and you are liable for the deemed calculations and payments, then almost certainly yes, unless you go the umbrella route.

So as always, it depends....

[J3ster]

IR35 Question

I have never worked an IR35 contract however it does now look likely that I will. One question i have that I have not been able to find an answer to is.

If my contract is IR35 do i still need an accountant and if so what for?

[jamesbrown]

If you are contracting to a client who is not in UK but the client subject to the Freedom of Information Act ( therefore public sector)

How and does the new public sector ruling apply?

In all honesty I believe it would apply - but I cannot find anything to confirm.


can anyone help?

Legislation here:

http://www.legislation.gov.uk/ukpga/...edule/1/part/2

Public sector is defined in 61L(1). Yes, FOI Act 2000, essentially.

In terms of a client that has no UK tax presence, note 61R(7)

Where—
(a)the client is the person treated as making the deemed direct payment,
(b)the worker is resident in the United Kingdom,
(c)the services are provided in the United Kingdom,
(d)the client is not resident in the United Kingdom, and
(e)the client does not have a place of business in the United Kingdom,the client is treated as resident in the United Kingdom.

So, I concur with your assessment. Out of curiosity, what is the special case that you're envisaging, i.e. a PS client that does not have a place of business in the UK?

[ireland2013]

What if client is abroad

If you are contracting to a client who is not in UK but the client subject to the Freedom of Information Act ( therefore public sector)

How and does the new public sector ruling apply?

In all honesty I believe it would apply - but I cannot find anything to confirm.


can anyone help?

[jamesbrown]

I meant a change post April.

Thanks, then I agree. Liability rests with the fee payer. As an armchair lawyer, I don’t think clauses that say differently would be enforceable, if they were tested, because there are terms implied by law / statute on where the liability falls. In general, they probably aren’t drafted adequately either.

[TheFaQQer]

The issue with a retrospective change is, I believe, that the fee payer has now made an assessment, as is their (new) responsibility, whereas the old assessment (and corresponding action) was the responsibility of the PSC (and by extension, its director/s). I assume that's what you mean by "retrospective", i.e. an engagement that straddles the old and new legislation. If you mean a retrospective change post April 2016 (i.e. post the new 10(2) of the ITEPA), then I agree. At the very least, I think it's worth making this distinction. Post April-2016, it's the responsibility of the fee payer, end of story, and any attempt to claw this back, even with a contractual clause that might allow this in principle, is, in my opinion, likely to fail.

I meant a change post April. I've heard some stories of clients now saying "we've looked at the situation and you're inside IR35 now, you always have been, and so we are going to take the PAYE and NICs that we haven't taken since April from you now".

My belief is that in that situation, while the fee payer might try to recoup that tax, they would fall foul of the guidance from HMRC even though it references employer / employee. As ever, if there are useful test cases to take on to clarify the legislation for the benefit of contractors, there are groups out there willing and able to take that fight on.

[jamesbrown]

New section added above about retrospective changes of status and clients attempting to deduct tax and NI from future invoices, based on anecdotal evidence of this happening.

Thanks for doing this thread, it's great

You provide ample caveats above, but on this point:

My feeling would be that the past tax must fall to the client / fee payer because they did not take reasonable care and the error was not made in good faith, so the dividends already paid would be allowed, the fee payer should pay the tax, but from this point on future invoices will be paid net of income tax and NI.

The issue with a retrospective change is, I believe, that the fee payer has now made an assessment, as is their (new) responsibility, whereas the old assessment (and corresponding action) was the responsibility of the PSC (and by extension, its director/s). I assume that's what you mean by "retrospective", i.e. an engagement that straddles the old and new legislation. If you mean a retrospective change post April 2016 (i.e. post the new 10(2) of the ITEPA), then I agree. At the very least, I think it's worth making this distinction. Post April-2016, it's the responsibility of the fee payer, end of story, and any attempt to claw this back, even with a contractual clause that might allow this in principle, is, in my opinion, likely to fail.

If you're referring to a change in assessment that straddles the change in legislation, I would view the situation as being for the PSC to correct any historical error, assuming it needs to be corrected at all (because this could be disputed). Further, I would view any attempt by the client to operate a deemed payment, retrospectively, when it was the responsibility of the PSC to do so would be not in keeping with the ITEPA and hence unlawful. But if the old assessment by the PSC was, in fact, incorrect, the responsibility would rest with the PSC to correct the old accounts and pay any tax/penalties due for their incorrect assessment. Again, my opinion is not worth any more than yours, since I'm not an expert, but the above seems more logical to me.

[TheFaQQer]

New section added above about retrospective changes of status and clients attempting to deduct tax and NI from future invoices, based on anecdotal evidence of this happening.

[northernladyuk]

How will this affect the money in my pocket?

Make no bones about it - if you are inside IR35 then you will have less money in your pocket (or company pocket) than if you are outside IR35. You'll have lost the ability to claim travel and subsistence expenses, your 5% expense allowance, the ability to make company contributions to your pension, and you'll be paying National Insurance and income tax that you probably aren't paying now. <sarcastic silver lining>The good news is that you aren't affected by the dividend tax any more!</sarcastic silver lining>

So how much more will I be paying?

I'm not an accountant, and I never will be, so make sure that you look at any calculations here carefully and run your own numbers.

The fee payer will be responsible for deducting tax and National Insurance from your gross invoice value and then paying your company the net amount. This means

• Employers National Insurance will need to be deducted and paid to HMRC. Technically, this is paid for by the "employer" not the "employee" - the agency / client cannot just make the deduction from your invoice and pay it over. However, the 13.8% of gross that needs to be paid to HMRC needs to come from somewhere - the agency (who may well be on a margin of lower than 13.8% anyway) will need to find the money from somwehere. They could (should!) be asking the client for this money, but there is evidence that agencies have been pushing this cost in the other direction and expecting the contractor to pay for the Employers NI.
• Employees National Insurance
• Income tax

As a rough example, if you invoice £1500 a week then you will have to pay approximately £165 in employers NI, £330 in income tax, £90 in employees NI - leaving you with a take home of around £915.

Bear in mind also that the tax deducted will be based on the assumption that your income remains constant throughout the year, so when you are benched or on holiday and not earning, the calculations will not necessarily have been correct. Any tax deducted incorrectly will need to be reclaimed via Self Assessment.

If your employer (agency or umbrella company) has a PAYE bill of over £3 million a year, then they have to pay 0.5% of that bill into a government fund for apprenticeships. As with Employers NI this is another charge that should be met by the employer, but they only have two places to get it from - the client or the contractor. I expect to see this charge being another one that is pushed down to the contractor.

What about corporation tax or dividend tax?

Good news (!) - you don't have to worry about these any more. Since all income from the contract must be paid out as salary, your company cannot make any profit from the contract - so there is no corporation tax to pay from the income earned from your public sector work. Likewise, since you have no profit from this contract, you have no means to legally pay a dividend - so there's no pesky dividend tax to worry about any more.

Obviously, if your company has other income streams from non-public sector work then these streams will need to be taxed accordingly, but you will not have any corporation tax liability for public sector work.

What about my expenses?

That's the bad news. Apart from direct cost of materials used in performance of the services; and expenses that would have been deductible if the worker had been the client's employee, you can't claim any expenses from the company. The point has been made to Treasury and HMRC that if you have any other expenses for your company then you have no means to pay these, but there has not been any acknowledgement of this problem. If your company only does public sector work, but has to pay for mobile phones, internet, insurance, or anything else then I cannot see how the company can legally do this.

Can I pay into my pension plan still?

You will not be able to make company contributions to your pension plan any more, because your invoices will have had tax deducted before being paid. You can still make personal contributions, but will have to make these from your net salary and then claim the tax relief back via Self Assessment. You will not be able to claim back the National Insurance deducted from your salary, though, so your contributions to your pension are likely to decrease significantly.

Any other financial implications that you can think of?

As if all this wasn't enough, if you have children and are claiming child benefit (or someone in your household is) then that's likely to get his as well. Your salary is likely to be much higher than it was before, and the moment you earn more than £50k a year your child benefit decreases. Once you earn £60k a year, it goes completely - so there's another hit there for you.

Oh, and one more possibility - if you earn over £100k then your personal allowance starts to reduce as well.

There may be other financial impacts, but that's probably enough to be going on with for now...

In terms of other financial impacts, psychocandy asked me to ask you if it's easier to sign on now between PS gigs.

[SueEllen]

Thanks TheFaQQer