Contractors' Questions: What if I’m contracting at a local council from April?

Contractor’s Question: I’m a worker who has been trading as a limited company since 2013. I am subject to VAT and Corporation Tax. I am registered with an agency who find me the placements primarily in a niche (non IT) sector. There are many workers like me who are technically employed by local authorities. How will the new IR35 rules from April apply to this council-based group?

Expert’s Answer: A local authority will be considered a public-sector client, therefore the new IR35 reforms will apply to you. You should discuss with the agency whether the local authority has considered your status and what action the agency proposes to obtain clarity on that front. If you know or suspect that your status is inside IR35 then you must consider the following:

  • Do you agree with the status suggested?

If not, then you should start discussing this with both the agency and the end client. The agency will likely act per the conclusion made by the local authority. So, if you disagree the best solution is to discuss with the local authority now and try to resolve any disagreement.

If you fail to persuade the local authority that you are outside IR35, you should consider your immediate choices:

  • Accept the position until the end of the contract
  • Terminate the contract and move to a new contract
  • Move to an umbrella company for the remainder of the contract

Assuming you decide to stick with the contract then you must start the conversation now.

The agency should have some plans for how your existing contract will need to be revised. It will not include clauses that consider the reforms and, crucially, you must find out whether the resulting Employer’s National Insurance is being met by the local authority or from your contract rate. If it is from your rate, then I recommend that you tell the agency you want to consider a rate increase.

The new rules are effective on 6th April 2017 and because they relate to payments made to your company from that date, they can affect the amount you receive for hours worked, and even invoiced, before that date if payment has not been received. Talk to your agency about how this is going to work as you will want to get paid up-to-date (gross) before the reforms apply.

Don’t forget to think about the effect of the lower take-home pay on your day-to-day cash flow. If the lower cash receipts are likely to be a problem, then you should start planning how to modify your lifestyle.

From an accounting point of view, you won’t be able to claim all the expenses you have in the past. You will need to understand what are employment expenses and then make sure those that are not given tax relief by the agency will be set aside for your accountant to claim via self assessment. Unlike other IR35-caught workers (outside the public sector), you won’t get tax relief for the flat 5% deduction.

However there won’t be any changes to the invoice you raise on the agency (unless you gain a rate increase), nor for the way that VAT is dealt with. But you will need to retain your payslips so your accountant can work out what to do in the accounts.

Ask your accountant to be ready to prepare a P45 for the first payment from the agency after 5th April and to check your tax code is correct. You should also ask them to put a stop to your own company paying you wages so excessive taxes can be avoided.

Finally, if you think that you will be entitled to employment rights, think again. You will get nothing from the agency or the local authority.

The expert was Duncan Strike, a director of contractor accountants Intouch Accounting.

Thursday 9th February 2017