IR35: Off payroll public sector workers

Is the planned reform of off-payroll working in the public sector likely to affect all contractors in the future?

Every limited-company contractor working through a personal service company (i.e. their own limited company), or operating through an umbrella company should be concerned about the government’s planned reform of intermediaries legislation. The changes if implemented will affect how IR35 is applied and how off-payroll contracting will work for contractors working in the public sector in future. Many fear that if the proposal is implemented for the public sector, it is only a matter of time before it affects contractors in the private sector too.

Intermediaries legislation, IR35, off-payroll working

The proposal detailed in a consultation document looks at making changes to the IR35 rules that apply for workers who operate through an intermediary, such as their own limited company, in the public sector. The government’s plan is to make public sector organisations, or the third-party agency (i.e. an umbrella company), determine the IR35 status of an engagement rather than the contractor’s company itself deciding whether the contract falls inside or outside IR35, and therefore, whether fees paid under the terms of the contract should be taxed at source.

The consultation document proposes that, from April 2017, responsibility for determining whether IR35 applies, and withholding tax if it does, will shift from the PSC (the contractor) and belong instead with the public sector body or the agency responsible for hiring and paying the contractor’s company.

What will change?

The proposal will change the dynamic between limited company contractors and their public sector clients quite a lot: instead of the contractor deciding on their IR35 status, it will make the client or the agency responsible for taxing the contractor’s income at source, if they believe that the contractor’s business falls outside the new rules. This, many professionals fear, will ultimately kill the market for contractors working through their own limited companies for the public sector. The fear that because public sector organisations will understandably be extremely risk-averse, most contractors working through PSCs will be deemed to fall inside the legislation, which means they will be taxed at source.

This move is likely therefore to kill the pool of talent that is available to the public sector. A survey conducted recently by the Association of Independent Professionals and the Self Employed (IPSE), has found that over half (54%) of so-called Personal Service Companies (PSCs) working in the public sector would leave the sector if the government proposal to change how they are taxed is implemented.

The result will be that the public sector will suffer from a dramatic loss of expertise, at a time when there is already an evident lack of expertise relating to Brexit, and this shortfall will be bad for everyone, including taxpayers. Then, for contractors, the market will shrink, as there will be fewer contractors wanting to work in the public sector, and therefore, more competition for non-public sector contracts.

The result could be catastrophic for the UK, the treasury, the public services on which many of us depend, and the whole economy.

Forced to increase rates

Is it surprising that so few contractors are willing to run their own company while being taxed at source like an employee when as a limited company contractor none of the benefits (i.e. holiday and sick pay, workplace training, bonuses etc.) of employment or employment rights in law apply.

If taxed at source, almost four in ten (39%) PSC contractors indicated that they would have no choice but to increase their day rate to compensate for any additional tax liability if the proposal is enacted. That will mean that the public sector will pay more for the skills they need among contractors willing to be taxed at source, which will increase the cost and strain on public funds further.

Private sector contractors

Many expert commentators fear that if the government introduces the legislation for limited company contractors working in the public sector that the same legislation is likely to be run out like a thick blanket to smother the rest of the contracting market.

Conclusion

If the decision is made to pass this legislation, it will be a political decision that is not based on sound economic or national interests. It seems to be more about the government seeking to ally public suspicions that contractors are milking the tax system and that they earn a far more from working through their own company than they would as an employee being taxed at source. You remember the debacle some years back about PSC working in the public sector, well this is where all this stems from.

However, as company owner knows, this is not the reality of running a business, which is an expensive and time-consuming, labour-intensive and courageous move that has benefits, limitations, and downsides like anything else. Limited company contractors might well benefit from no national insurance and lower taxation under corporation tax, but the disparity soon evens out, especially now that the dividend nominal tax rate has been reformed. Limited company contractors look after their own administration, do not get paid holiday or sickness pay, don’t get paid for bank holidays, and enjoy none of the other benefits an employee typically enjoys. Most importantly, contractors take on risk in an uncertain market.

Does the government really consider it is good governance to attack contractors for the sake of political posturing and to kill a whole industry, with catastrophic consequences to the UK economy?

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.