Earlier this week on the Panthera blog, we asked a question - When does a contractor become an employee?. That’s one article that has really generated a response and got a lot of you to get in touch with us.
But why should such an article get you talking? It’s all about changes that have been made lately to the IR35 system where work is being carried out to benefit a public sector organisation or a private company owned by a public sector organisation.
Panthera examines the changes.
IR35 public sector – what’s changing?
The law itself isn’t changing on what contractors deemed to be disguised employees pay.
As you know, if a contractor’s work is deemed to meet IR35 stipulations, then the contractor company must pay tax and National Insurance as normal through the RTI (real time information) system.
This has always been controversial because the amount of tax an IR35 contractor pays is absolutely identical as if he or she was a normal employee.
However, they do not benefit from normal employment rights and expectations – holidays, sick pay, maternity/paternity/adoption leave, auto enrolment pensions and of course protection from unfair dismissal.
On top of that, they normally have to pay a servicing company (between £1,000-£1,500 a year) plus an accountant and a bookkeeper. It’s not a very good deal for them.
Up until now, it has been up to the contractor him- or herself to determine whether IR35 stipulations apply to them. Savvy contractors will structure contracts, working procedures and practices, and so on to be as bulletproof against HMRC investigation as possible. Even nearly 20 years after its introduction, IR35 confuses a lot of people and companies (and some tax inspectors) so the whole situation has never been clear-cut anyway.
What changed on April 6th this year (2017) was that if a contractor is working for a public sector body or a company or organisation owned by a public sector body, it’s now up to the public sector body or associated company (or the servicing company that places them) to declare whether IR35 applies or not. Power has been taken away completely from contractors.
IR35 public sector – what difference will it make?
Contractor forums (like the excellent Contractor UK) report that they are hearing from their members a much higher risk aversion from clients in the public sector who do not want to make mistakes with IR35 classification.
IPSE director Andy Chamberlain, writing exclusively for Contractor UK, states that “(t)he draft legislation puts the burden of responsibility on the entity that pays the contractor. Very often this will be an agency. However, agencies are unlikely to have sufficient information about the working practices so they will ask the client to give an opinion on IR35 status. The client is statutorily obliged to provide an answer within 31 days.”
Contractors will increasingly find themselves in a situation where neither the agency or the public sector body is well-informed enough about either the law or the specific circumstances of the contractor’s duties to make an informed judgement.
Again from the Contractor UK site, Ministry of Defence procurement officers and officials are now tell all contractors to join the PAYE or leave (link).
IR35 public sector – clear as mud
In order to assist contractors, agencies, and public sector officials, HMRC have launched an Employment Status Service questionnaire – you can find it here.
There’s a problem though, as discovered by the team over at Contractor Calculator. Many contractors using the service are being told by the questionnaire that their IR35 status is “unknown”, even though they have answered all the questions.
It entered the results of 21 historical IR35 court cases into the ESS. 27% of the answers produced by the ESS said “unknown”. And 10% of the scenarios that a judge deemed to not meet IR35 criteria were described by the ESS as meeting IR35 criteria. In this situation, who can a contractor trust?
IR35 public sector – share your views
Have you been affected by the IR35 public sector tax changes? Please get in touch with the team on 01235 768 561 or email firstname.lastname@example.org.