The new IR35 tax legislation – what’s the story

By March 22, 2017 April 24th, 2017 Procurement

and what do you need to do

If you work in the public sector, Thursday 6th April 2017 might be a very important date.
The Chancellor of the Exchequer’s Autumn Statement last November confirmed reforms to IR35, otherwise known as the intermediaries’ legislation. IR35 is designed to ensure that individuals who work through a PSC (personal services company, sometimes known as a limited company) pay employment taxes in a similar way to employees. The new reforms kick in – in a couple of weeks.
So do you fall under this new legislation? How will it really impact you and/or your business? And what do you need to do to make sure you comply?

Does IR35 apply to you?

First, you need to establish whether you do indeed work in the public sector. For the purposes of IR35, this is the case if your organisation is subject to the Freedom of Information Act. Simple as that.
Next, you’ll want to identify whether IR35 applies to you, or any individuals working for your business. The answer is likely to be yes if any of the following apply:
You’re told how to do your work
You’re named in your contract as the sole provider of your services
You agree to work on anything that comes along
You allow your client to change what you are working on
You have long termination notice clauses
You’ve got minimum hours specified in your contract
Other people may well think of you as an employee – you’re ‘part of the furniture’
You undergo a performance appraisal
You’re paid for time off sick or holidays
You’ve contracted with a former employer the day after leaving work
You don’t currently assess your IR35 status

What do the changes mean?

 Sound like you or people who work for you qualify? Then you need to understand exactly what these reforms mean.
The new IR35 has two main features.  First, it makes the public sector organisation (not the PSC) responsible for determining if their assignment is one of employment or self-employment. Secondly, if the assignment is confirmed to be employment rather than self-employment, again it is the organisation (and not the PSC) that has responsibility for deducting tax and National Insurance Contributions (NICs), and accounting for Employers’ NICs.
The upshot is that public sector organisations will soon (if they are not already) be seeking to assess the IR35 risk of their workers prior to 6th April. They will need to Identify any PSCs working directly into the local authority, and assess roles rather than individual workers, asking questions such as “does this assignment cover a permanent role?”

What should public sector organisations do?

HMRC’s own tool will now help you classify roles, but you may still struggle to find enough time to assess your existing PSCs. Thankfully, these seven steps will help ensure you’re compliant:
1. Set up a new RTI PAYE scheme for PSC workers, to avoid mixing them with your permanent employed workforce
2. Start to gather the information you will need to add PSC workers to the new PSC RTI scheme. Much of this will be personal to the worker and unlikely to be held on current systems e.g. NI number, date of birth
3. Update the contracts with your PSCs, authorising PAYE/NIC deductions to be made based on the assessments made by the public authority
4. Implement accounting controls to reconcile gross invoices with net post-tax payments
5. Flag accounts payable systems accordingly and make payment blocks on PSC accounts, subject to processing through RTI by your payroll department
6. Ensure all invoices associated with work undertaken are paid prior to 6th April 2017
7. Renegotiate the price of contracts. Revised pricing will need to be calculated based on the preferred engagement model. Consideration might be given to both incumbent and new workers’ assignments, for example:
Incumbent workers – recruitment provider to apply NIC and other employment costs e.g. Apprenticeship Levy, if applicable, on top of the current pay rate as well as making deductions from the current pay for NIC and other employment costs, if applicable
New assignment – recruitment provider to factor in NIC
The important thing here is to take a positive, proactive approach so you don’t end up caught in the unproductive buck-passing cycle.

What should individuals do?

If you’re a PSC whose assignment falls within IR35, you have three main options:
1. PSC: remain as a PSC, but be aware that your pay will be subject to PAYE and NIC deductions. This means that your hourly or daily pay rate is likely to be reduced, because the organisation you’re working for now has to account for employer’s NIC
2. PAYE: become a PAYE temporary employee instead. Again, your pay rate will probably suffer or the same reason, but on the upside you’ll now get benefits such as employment rights and holiday pay
3. Umbrella: get in touch with a vetted Umbrella Company provider. They’ll become responsible for administering PAYE income tax and NICs deductions, as well as providing benefits such as employment rights and holiday pay. Although again – you guessed it – your pay rate will likely take a hit
Most importantly of all, don’t panic! HMRC aren’t out to get you, just because you’re self-employed – the new legislation is purely designed to enforce better PAYE/NIC compliance. As long as you put in a little thought and effort to ensure that your tax and NI deductions comply, you can keep working for your existing public sector clients with all the benefits that self-employment brings.
Any questions? Still worried? Just send us an email, give us a call or shoot us a tweet.