HMRC has published a series of documents outlining the forthcoming ‘off-payroll’ IR35 rules for contractors working for public sector organisations.
An overview of the public sector IR35 changes: reform of intermediaries’ legislation
From 6th April 2017 onwards the responsibility for determining whether or not a contract is ‘inside IR35’ will rest with the public sector client. If the contract is caught, then the client will be responsible with operating IR35, and deducting any income tax and National Insurance Contributions (NICs) deemed to be owed by the contractor.
Clients have been promised the use of a soon-to-be-released ‘Employment Status Service tool’ to help them determine the employment status of workers, although previous attempts to create a universal tool of this nature have failed miserably.
How will limited contractors be affected? Personal service companies
If your contract work is deemed to be ’employment’, as per the IR35 rules, then your fee-payer will be responsible for working out your direct deemed payment, and will deduct tax and NICs at source. If your company is VAT registered, you should still add VAT to your invoices, and repay HMRC quarterly as usual.
If you are caught by the new rules, you can decide whether to draw down income from your company in the form of salary and dividends. To prevent being taxed twice, you can pay yourself up to the amount of the deemed direct payment from your public sector work, without further disclosures. Of course, if you undertake non-caught contract work during the year, this income will be subject to additional tax.
Practicalities of making deductions from contractor fees: reform for fee-payers
Any fee-payers should make deductions from any temporary workers caught by the off-payroll rules.
Advice for public sector bodies who hire contractors: Public Authorities
If a public sector organisation takes on a temporary / contract worker, they must first decide whether the off-payroll worker rules apply. If so, the client is responsible for deducting income tax and NICs from the temporary worker’s income and reporting the deductions to HMRC. To help the organisation work out if the worker is subject to IR35 or not, the Employment Status Service tool is expected to be helpful once launched.