There has been a lot of supposition lately about the Budget, IR35 and the Private Sector. But for those contractors who haven’t been around for the whole saga, here’s a snapshot of what’s happened, why it matters and what might happen next…
‘IR35’ refers to legislation intended to prevent contractors from reducing their overall tax liability by working through their own Limited Company even though they do the same job as an employee. In other words it seeks to prevent “false self -employment”. Grey areas within the legislation have made it sometimes difficult for contractors to determine their position, and if HMRC or the contractor themself decides that their contract terms and working practices falls ‘within’ IR35, they will have to pay tax and National Insurance on a very similar basis to an employee.
Contractors find themselves financially better off working on contracts ‘outside’ of IR35, and whether in or outside of IR35, having their own limited company gives a better take home pay than an Umbrella company.
Until April 2017, the contractor was responsible for determining whether their contract was inside or outside of IR35, according to the rules set out by HMRC.
But then it all changed…
From April 6th 2017, legislative reforms meant that the burden and responsibility of determining IR35 status for Public Sector Contracting was now with the client, not the contractor.This legislative move is perceived by some commentators as HMRC ‘testing the water’ in advance of potentially rolling out the reforms to the Private Sector, with rumours abound that next steps will be referenced in the November Budget. The sampling process was expected to highlight the pressure points in a partially controlled environment.
However, the implications of the Public Sector reforms have been more wide-reaching than anticipated, with Public Sector entities like the NHS blanket-applying IR35 across all contracts, for fear of getting it wrong and incurring fines, or perhaps just taking the path of least resistance. Not wanting the associated administrative burden of payroll management, they also insisted on their contractors using umbrella companies. This double whammy of having the Employer’s National Insurance costs passed down to the worker (and not borne by the Engager), not resulting in an increase to the day rate plus the cashflow disadvantage of being taxed at source and still having to pay the umbrella fee left contractors substantially out of pocket. Many decided to work elsewhere, return to permanent employment or work only in the Private Sector in future if their skills were transferrable. Although HMRC are insisting that they have yet to see any adverse effects on large government projects, anecdotal evidence suggests otherwise, with reports of under-resourcing and project delays.
So, in short, that’s why those of us who champion the rights of UK contractors will be watching the November Budget very closely. As our MD Paul Gough says “The ‘IR35 experiment’ in the Public Sector has not delivered the outcomes Treasury and HMRC expected and that is even under the favourable conditions where the engager is part of their team! Imagine the chaos should the ill-considered, poorly defined outcomes be forced upon the vital and fiercely independent Private Sector.”
You can read more of Paul’s opinions on the matter in his recent article for Contractor UK.
If you have any questions relating to IR35 or want to find out more about our Contractor Accounting service, call us now on 01202 375 562.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.