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- Julia Kermode
This April saw IR35 reforms take effect in the public sector.
The arrival of the legislation has been much heralded and its impact much maligned as a move that will undoubtedly impose a significant burden on an already overstretched public sector and puts agencies in the frame, making them responsible for carrying out HMRC’s enforcement work – which is wrong. Under the new IR35 legislation, public sector end-clients are now responsible for determining whether their contractors are inside IR35, and if found to be inside IR35, contractors must have tax and NICs deducted at source via PAYE.
We are already seeing the impact as we hear of locum doctors not turning up for their shifts and IT contractors abandoning public sector projects. There is no doubt that the new legislation is going to be complex to administer, and most end-clients are not intending to add contractors to their in-house payroll, instead opting for the supply chain to take on the newly defined ‘feepayer’ status, and liability for ensuring correct tax and NICs are paid.
We have lobbied hard to help the Government to understand the wide-ranging impact, but the policymakers have repeatedly told us that the changes will only affect those contractors who are not compliant with current IR35 legislation. This is simply not the case in practice where, in the absence of proper guidance at an early stage, we are seeing end-clients with no option but to issue blanket bans on people with significant control (PSCs), or make wholesale decisions that all contractors are caught by IR35, with significant consequences for the supply chain.
In essence, the changes mean that contractors deemed caught by IR35 will be paid via payroll, and in addition to the PAYE and employee’s NICs that will be deducted from a contractor’s gross pay, there is an additional cost incurred through any real time information (RTI) payroll process, that of employers NICs. Legally, employers NICs cannot be deducted from employees’ gross pay, so this additional cost must be factored in to assignment rates. Umbrella firms can support agencies in calculating the impact of deductions including employers NICs, the assignment rate and the resulting gross pay rate for contractors. Transparency is key, and good communication is needed to explain the detail to contractors so that misunderstandings do not occur.
I also want to fire a note of caution to agencies and contractors when choosing umbrella firms to partner with – there are a lot of newcomers entering the market with no track record, so due diligence is essential to minimise risk for all parties. I would also urge everyone to be wary of the tax avoidance schemes that are on the increase – these are highly contrived and place the contractor at significant personal financial risk. They often split pay into two portions, with one taxable element being set very low to minimise tax, and the remainder might be in the form of annuities or other income which the providers claim is not taxable. These disguised remuneration schemes are highly contrived and HMRC will pursue users of such schemes for unpaid tax; it is the contractor that will receive the bill and not the provider. The message to contractors is: do not be tempted to enter into anything which promises unusually high take-home pay after tax – it is far better to pay the tax and look to reclaim any overpayments if you are found to be outside IR35 in due course.
We would not be where we are today if HMRC had properly enforced the original IR35 legislation 17 years ago. It is ill-thought through and the fallout could be disastrous, not least for public sector bodies, which will lose out on vital skills as contractors seek roles elsewhere in the private sector.
Julia Kermode is Chief Executive of the Freelancer and Contractor Services Association (FCSA), the UK’s largest independent trade association for umbrella firms and specialist contractor accountants which has been leading a campaign against IR35 reform in the public sector.
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