Will restrictions affecting public sector contractors soon affect contractors working in the private sector as well?
Will the changes to off-payroll working in the public sector, confirmed at the Autumn Statement 2016, affecting how public sector contractors and their clients in the public sector must now be jointly responsible for compliance, soon affect the private sector as well?
Who knows, but all contracts should be hyper-aware, beware, and make sure they’re fully compliant with the rules for IR35/intermediaries legislation. The number of public bodies that come under the “public sector” / “public authority” umbrella underlines the huge reliance of the public sector on contractors, and, therefore, the likely long-term affects of the new rules both on contractors and the public services are likely to be felt harshly.
Public sector contractors
With this new rule guided by an online HMRC Gateway tool, the dynamic between limited company contractors and their public sector clients has totally changed. Now, instead of the contractor deciding on their IR35 status, it will make the engager responsible for taxing the contractor’s income at source if they believe that the contractor’s business falls outside the new rules. The fear is that public sector employers will be extremely risk-averse so that most public service contractors working through PSCs will be deemed to fall inside the legislation. Christine’s example illustrates how this public sector contractor fares using the HMRC Gateway tool.
What does this mean to the tax position inside IR35?
If deemed to be operating inside IR35 then a deemed salary calculation should be run to declare PAYE and National Insurance on 100 per cent of the contractor company’s income. Note that the 5 per cent allowance previously allowed for the running of the company is now no longer applicable to public sector contractors. Certain specific deductions can be made for items such as pension contributions, but no allowance can be given for travel and subsistence costs, as they were removed under the rules in April 2016.
What can private sector contractors do?
First and foremost, pay attention to the three main tests to determine whether you are inside IR35 or outside:
1. Control: a worker is not an employee unless there is a right to exercise control over her or him. This could be a right to control what work is done, where or when it is done, or how it is done. The right of control is the important issue and not the actual control.
2. The right to substitution, you can get a substitute or assistant to do the job: personal service is an essential element of an employment contract. A self-employed person has the freedom to choose whether to do the job herself or hire someone else to do it for her; s/he may hire someone else to provide substantial help.
3. Mutuality of obligation: there should be various mutual obligations within the contract. The obligation to perform and to be paid would form part of any contract – but the mutual obligations needed for a contract of employment consist of more than this, there needs to be obligation to offer, and an obligation to accept, future work. There are other factors also, please see here.
All contractors should pay careful attention to the “substitution” clause of their contract, making sure it stipulates that they can send a substitute when necessary. The right of substitution is the ultimate factor. Make sure that every contract includes the clause about substitution and that it is worded correctly to ensure any substitution right is valid ? it must be unfettered and you must pay the substitute yourself. And if you then exercise the right it’s impossible for HMRC to prove personal service exists ? which means you can never be a disguised employee and therefore you will fall outside IR35. Take the IR35 test here and, depending on your score, DNS will gladly help you negotiate the legislation from there.Checklist for contractors
- All contractors should pay careful attention to every contract they sign for each job.
- A review of your contract and working practices to determine your status is advisable, if not essential, as is taking out tax investigation insurance.
- All contractors should act as business owners, beginning with the basics:
- Own a letterhead, business cards, compliment slips;
- Have an up-to-date website and corporate profile online and offline;
- Work with several clients and strive to attract new ones;
- Network, build contacts, and demonstrate a focus on business growth.
No can foresee whether the restrictions affecting public sector contractors will affect private sector contractors too, or how soon, but the advice given here in the checklist, if you follow it, will keep you on the safe side.
DNS works closely with all contractor clients to make sure they know where they stand with IR35. Take advantage of our contract-checking service and make sure you have Tax Investigation Insurance, discounted for all DNS clients.