HMRC has published a series of documents outlining the forthcoming ‘off-payroll’ IR35 rules for contractors working for public sector organisations.
The documents – one providing an overview, two aimed at clients, and another at limited company contractors, are as follows:
An overview of the public sector IR35 changes
[Off-payroll working in the public sector: reform of intermediaries legislation ]
This document provides an overview of how IR35 will be applied to off-payroll working in the public sector from 6th April 2017 onwards.
In essence, from this date, 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 for 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?
[Off-payroll working in the public sector: personal service companies]
This document is aimed at limited company contractors who undertake contract work in the public sector. 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
[Off-payroll working in the public sector: reform for fee-payers]
This document describes how 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 – using a personal service company]
If a public sector organisation takes on a temporary / contract worker, they must first decide whether the off-payroll worker rules apply and 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 come in handy once launched – later in February.
Public sector IR35 – FAQ
For more information on how contractors will be affected by these changes, try our useful FAQ with industry expert, Seb Maley – IR35 public sector changes – what contractors need to know.