The consultation on the proposed changes to IR35 closed on 18 August. If the changes are approved, from April 2017, the responsibility to ensure you are paying the correct employment taxes would switch from you (the contractor), to the public sector body or agency you are working for.

It’s important to note that these changes only affect public sector contractors. If you are a contractor in the private sector then your obligations will remain the same.

How will public sector bodies determine your IR35 status?

In the first instance, the contracting party will use a new gateway which will indicate the rules that need to be considered. At this stage, if 20 percent or more of the contract is for materials used in the provision of the service, the IR35 rules will not apply. However, this is unlikely to apply to the majority of contractors.

Having established that a contract is within the scope of the rules, the next step is for the public sector body to answer two questions:

1.) Is the contractor required to do the work themselves?

2.) Does the contracting party decide or have the right to decide how the work should be done?

If the answer to both questions is ‘yes’, IR35 will apply and the contracting party will be responsible for deducting the necessary income tax and National Insurance contributions and making the payment to HMRC. If the contracting party cannot answer ‘yes’ to both questions, it must move on to the next step of the process, which is to use HMRC’s ‘digital tool’.

HMRC is developing an online tool to determine a contractor’s tax status. The digital tool has yet to be released, so we will have to wait to see how effective it will be in practice. However, at the moment contractor tax experts remain doubtful as to how the tool will be able to solve a problem that has conflicted tax advisers for the last 16 years.

How will contractors be affected by IR35?

All public sector contractors who do not meet HMRC’s definition of ‘self employment’ will be affected. The result will be an increase in their tax and National Insurance liability. Essentially, contractors will be taxed as if they were employees. The very real risk is that contractors who fall inside IR35 will be deterred from working in the public sector, which will ultimately affect public sector organisations’ ability to deliver their projects.

The relationships between contractors and contracting parties

The accuracy of the process will undoubtedly come into question due to the fact that not all contracting parties will have the necessary experience to apply the changes correctly. There are also concerns about the accuracy of the ‘digital tool’.

Of course, contractors will want to fall outside IR35 legislation. In cases where contractors have been working outside IR35, but are moved inside the legislation by the contracting party, there is clearly the potential for disputes. It’s also likely that those contractors who are moved inside IR35 will charge more for their services to maintain their level of take-home pay. This is another area where disputes may arise.

At the moment there is also some confusion about allowable expenses. Contractors who fall within the remit of IR35 will likely have to submit their expenses to the contracting party, which may lead to disputes about the permissibility of the expenses.

What should you do?

If the new rules are put in place, we would urge all contractors to bear in mind the potential for dispute, and take special care to maintain positive relationships with their contracting parties. We would also suggest you engage in private sector contracts as well as public sector work may also assist contractors to protect their income in the future.

If you’re confused about the IR35 changes or would like to know more about the likely consequences for you, please get in touch with our specialist contractor accountants by submitting the consultation form to arrange a call.

To find out how KPMG Small Business Accounting could help free up your time so you can concentrate on your role, request a callback for a quote today.

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