What are the possible IR35 changes and will they affect you?
There has been much speculation among public sector contractors about recent proposals put forward by HM Revenue and Customs. HMRC wants individuals operating through a limited company within the public sector to be assessed for IR35 by whoever pays them, whether it’s an agency or the end client. Currently, it is the limited company’s responsibility to assess whether a contractor falls within IR35 or not.
HMRC’s proposals are expected to come into force by April 2017, and will be introduced with a new digital tool to assess whether public sector workers fall inside or outside IR35. This will help employment agencies and end clients assess working practices and determine the tax status of contractors.
What are the implications for contractors and agencies?
Contractors who discover they are actually operating inside IR35 could face a different tax position, potentially resulting in lower take home pay. Rather than splitting their income into salary and dividends, IR35 contractors are required to withdraw their profits using the PAYE system (see our contractors guide for a case study example of how this would work). The result is a potentially significant increase in their tax payments.
The role of recruitment agencies that pay the end client will grow if the proposals come into force. From April 2017, they will be responsible for conducting a thorough assessment of an individual’s contract to determine whether it falls inside or outside IR35. This must take place before the contract is finalised.
Could this move threaten the future of some public sector contractors?
The proposed changes could have serious repercussions for some public sector contractors. The loss of tax efficiencies will have the effect of reducing the financial incentives for some contractors, thereby reducing the pool of flexible workers for recruitment agencies and clients to choose from.
For the time being, these changes are only being targeted at public sector contractors, but that still includes a diverse pool of workers ranging from teachers and social care workers to IT consultants, NHS workers and management consultants.
Are the changes likely to impact on contractor morale?
Workers found to be inside IR35 having previously been outside will be most affected. However, the biggest worry for Bivek Sharma, Partner and Head of KPMG Small Business Accounting Services, is the potential gulf it could create between the public and private sector. In an article for Recruitment Agency Now he comments: “The worry is that it will create an unbalanced playing field between the public and private sector. For example, an IT contractor working for a large private sector organisation will be potentially subject to a different set of rules and a different threshold of take home pay compared to an IT contractor doing similar work in the public sector.”
What’s the next step?
At the moment it’s not clear how these proposals will evolve, but there’s certainly a need for more clarity around how and when these changes might be rolled out in the private sector. There are also a number of uncertainties about how it would be reported and what would happen if an individual’s circumstances were to change, thereby moving them from outside to inside IR35.
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