27 April 2017
New IR35 rules came into force for public sector contractors in April. We take a look at what they involve – and the potential ramifications…
The dawn of a new tax year has caused headaches for many contractors, bringing with it a significant shake-up in the IR35 legislation.
New measures officially came into play on April 6 [SC1], designed to reduce tax avoidance among public sector contractors who use personal service companies. Despite this laudable intention, it’s feared that perfectly innocent contractors could end up being caught in the crossfire.
So what does the IR35 legislation actually involve, and why might the latest reforms prove financially damaging to contractors working with public agencies?
IR35 in a nutshell
HM Revenue and Customs (HMRC) launched its intermediaries (or IR35) legislation at the turn of the century, in a bid to clamp down on contractors who were disguising employment to avoid tax.
Many contractors supply their services to clients through intermediaries – for example, their own limited companies or personal service companies. IR35 seeks to identify those who would be classed as an employee of a particular client if they weren’t using an intermediary. Contractors falling within the IR35 rules may be required by HMRC to pay income tax and National Insurance (NI) contributions [SC2].
The trouble is that IR35 has often proved controversial over the years, forcing legitimate contractors to spend valuable time proving they’re paying the right amount of tax.
IR35 can be complex at the best of times, however, contractors working specifically for public sector organisations may face added pressure as a result of the latest shake-up.
Traditionally, those working for a public sector client through a personal service company have been able to determine their own tax status – and whether they fall within the remit of IR35. But April’s reforms switch things around, making it the client’s responsibility to decide if their relationship with a contractor is essentially disguised employment.
If they feel a contractor should be classed as an employee, the client will be required to deduct income tax and NI from any payments they make to them. They might also have to make employer NI contributions.
What are the financial consequences?
The IR35 shake-up could have major financial ramifications for the likes of NHS, central government and local council contractors – with the potential to affect thousands of people.
To comply with HMRC’s rules, it’s feared that some public sector organisations may choose to play it safe and adopt a blanket approach, automatically treating their contractors as employees instead of reviewing them on a case-by-case basis. Such a decision could seriously dent the finances of contractors, with NI and income tax being removed from their payments.
In a further blow, a contractor’s employment status won’t change, even if it’s deemed they should be paying tax like an employee. This means they won’t have access to employment perks such as holiday pay or pension contributions [SC3].
More information on the changes is now available from the Government
How can contractors respond?
If you’re wary of getting caught up in the revised IR35 rules, seeking the guidance of an accountant might prove helpful – notably one who specialises in the arrangements of contractors.
Broadening out your client base may also be beneficial, and you could even shift your focus away from the public sector, since private firms aren’t impacted by the changes.
However, don’t forget about the peace of mind offered by insurance. While the future shape of IR35 may be uncertain, a tailored insurance policy will at least cover your business against other potential threats – for example, financial losses or public liability.
Such threats are covered by our regionally-traded Contractors Combined product. This policy offers Financial Loss cover up to £250,000 as standard while also offering Public Liability cover with a flexible limit of £5,000,000. Here are some of the other reasons to trade NIG’s Contractors Combined product:
You can find more information about NIG’s Contractors Combined, including Key Facts, Sales Aid, Proposal Form and Policy Wording, on our website here.
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