Working in the public sector? An FAQ about IR35

[TheFaQQer]

What's this all about then?

In the 2016 Autumn Statement, the Chancellor confirmed that from the start of the following tax year (from April 6th 2017), the status of contractors / freelancers in the public sector would be assessed by the public sector body (PSB) engaging them either directly or via an agency. Where the PSB determines that the contractor is inside IR35, the fee payer (the company closest to the contractor company) will be responsible for deducting PAYE and National Insurance as if the contractor was an employee. This applies to all payments received after April 6 2017, regardless of when the work was done or even if you are in contract any more.

The decision to bring the changes in was done so despite significant opposition from many places (I personally sat with HMRC and explained why this was "a very bad thing", and know many others that did too). However, HMG ignored the voices from many quarters and brought forth the rules anyway. So what does this mean for contractors in the public sector?

In Summary

For contractors working in the public sector

• Their IR35 status will be determined by the client
• If you are determined to be inside IR35 then all payments received by your company will be made after PAYE and NI have been deducted
• Travel and subsistence expenses will no longer be allowed
• The normal 5% allowance for expenses does not apply to public sector engagements
• Even though you will be taxed as an employee, you will not gain the rights an employee is entitled to

Please note, this is my own personal view on the changes to how IR35 is determined in the public sector. I have drawn heavily from published sources, notably the IPSE Guide to IR35 in the Public Sector (2017) which can be downloaded from their website

[TheFaQQer]

How do you define public sector?

For the purposes of this change, "public sector" is defined as any organisation that is subject to the Freedom of Information Act. This will include some organisations that aren't normally considered to be part of the Government such as universities and colleges, but excludes some companies where the government has a significant ownership stake such as Royal Bank of Scotland. There may be some uncertainty about wholly owned subsidiaries of other bodies which may not be covered by the FoI Act itself - contractors who are working in any area are advised to confirm with your client whether they are defined as public sector for the purposes of this legislation.

I work via a consultancy to the public sector - do the rules apply to me?

This is not particularly clear, as Kate Cottrell explains in this article.

Whether the consultancy is affected by the new rules or not hinges on their contract with the PSB and what they are actually delivering. The key point is whether the consultancy is supplying services or supplying people - it is well worth reading Kate's article since that includes specific examples which I won't attempt to reproduce here.

At the moment, the rules do not apply to any other organisations - time will tell whether this change will be implemented further.

How can my client determine whether I'm inside or outside IR35 or not?

This is the crucial part of the legislation - the onus has shifted to the PSB to make that decision which will affect your company significantly, but the number of clients who understand IR35 (or have even heard of it!) is very low. We know that the rules are complicated, and yet if the client makes the wrong decision they are liable to pay the tax and NI due if they are wrong. This means that clients may err on the side of caution when judging whether the contractor is inside or outside - the legislation says that they have a duty of care to be accurate, but whether that is enough to ensure that clients do not adopt an automatic "you are inside" decision only time will show.

What can the client do to make that decision?

The way that the client decides whether you are inside or outside is not determined in law, but the PSB MUST make an assessment of whether the contractor is inside or outside within 31 days of being asked. HMRC have produced an updated Employment Status Service online tool (https://www.gov.uk/guidance/check-em...status-for-tax) which anyone can use to check whether HMRC believe that the engagement is caught by IR35 or not.

Using the ESS is not mandatory - the client can use any method they choose to determine your IR35 status - but HMRC have said that they will stand by the results of the tool, providing that the answers given were honest and accurate. The tool is still evolving, so it is well worth saving any decision you receive if you answer the questions since HMRC do not retain any record of who completed the questions, when, or what answers they gave.

Whether your client uses the tool or not, you may be well advised to complete it yourself and retain the result for use in any future investigation. Be as accurate as you can, and if the result is that you are outside IR35 then you should show the assessment to your client and agency - if they agree that the assessment is accurate then your business should be able to continue billing as normal and receive gross payments.

At the moment, it is difficult to know how accurate the tool is - if you are an IPSE member and have concerns over the tool then it is well worth contacting the policy team with your experiences so that these can be collated.

I disagree with the assessment - what can I do?

Throughout all the consultation periods, the Government has said that there will be a right of appeal, but they have not outlined what the right of appeal is. It would appear that the way that a contractor can appeal the decision would be via a taxation tribunal - something that is going to take time and money to fight. If payments have already been made incorrectly, the mechanism for refunding the PAYE and National Insurance has not been detailed - I do not believe that it is possible to get incorrectly paid NI refunded.

Some PSBs may set up their own appeals processes and procedures, but it is too early to know whether that will happen or not. In an ideal world, there will be a quick and easy way to raise your concerns with the client and work together to resolve them - but until there are lots of complaints and appeals, I cannot see that happening.

[TheFaQQer]

What about my contract?

If your contract runs past April 6th, then you have probably left it too late. If you receive a payment after April 6th 2017, the new rules appply and the client must make a determination of whether you are inside or outside IR35 and if necessary deduct tax and NI.

I'm outside now, and the client says I'm still outside. Is that OK?

Be careful when you hear something like this, particularly if it's coming from an agent (remember, their lips are moving...). You should immediately get clarity on exactly what is being said here - is the client saying that the new rules do not apply, or are they saying that they have completed an assessment and you are outside IR35? It is vital to know exactly what you are being promised here, because your livelihood depends on it.

If the client has made the assessment that you are outside, then you should keep that assessment safe and in writing - if HMRC come calling this is your "get out of jail free" card since the liability rests with the fee payer for an incorrect assessment. If the client has made the decision that the new rules do not apply, then again keep this very safe - it's not as good as delcaring you as outside, but it's a good thing to have.

I'm inside now, and the client says I'm inside. What should I do?

Even this is bad news for you - that 5% expenses that you can claim now has just disappeared. The amount of money your company pays into your pension as an employer contribution - that's gone too. Because the client / agency has to deduct tax and NI from your invoice before paying you net.

So even though you aren't affected by having to stop claiming travel and subsistence, you are still worse off because of the new rules.

I'm outside now, and the client says I'm inside from April 6th. What should I do?

This is where it gets tricky for you. You can appeal the decision (see above), but this is going to take time and effort. You can leave the client, but this is going to cost you money unless you can walk into another role quickly. If you want to stay with the client then you need to make sure that the contract from April 6th is priced at an appropriate level - bear in mind the changes to your expenses as well as taxation when determining what your new rate should be.

BUT... where there is a potential problem for everyone making this change is that HMRC might well look at their data set that shows that up until April 5th 2017 the agency was paying your company as outside IR35, but from April 6th the same agency was paying the same company as being inside IR35. It is perfectly natural for contractors to be thinking "will HMRC come after me for my earlier work?" as well as HMRC to think "why wasn't this previous work inside IR35?". There is nothing in the legislation which prevents HMRC from asking this question, and HMRC have refused to declare an amnesty for those contractors who find themselves in this kind of position.

Looking at the data that is provided by an agency to HMRC, they do not provide the job title, client, job role or any meaningful details about the work that your company is providing to the client. There have been a number of discussions here around whether HMRC will have a data set that clearly identifies who (and what) to ask - I will not speculate on whether this is likely or not. However, I would carefully consider what implications might be drawn by an agency continuing to pay the same contractor under different terms from one pay period to the next. It might be a different matter if the contractor changed agency, but I would be wary about continuing under these circumstances.

Should I just leave the public sector?

Only you can really answer this - nobody else knows your skills, what you do, what the market is like for your skillset, where you have worked, how badly you need the job, how close to retirement you are and so forth.

The only guaranteed safe way (for the time being) to be away from these rules is not to work in the public sector. Whether you can afford to do that, or even want to do that, is something that only you can answer.

[TheFaQQer]

How will this affect the money in my pocket?

Make no bones about it - if you are inside IR35 then you will have less money in your pocket (or company pocket) than if you are outside IR35. You'll have lost the ability to claim travel and subsistence expenses, your 5% expense allowance, the ability to make company contributions to your pension, and you'll be paying National Insurance and income tax that you probably aren't paying now. <sarcastic silver lining>The good news is that you aren't affected by the dividend tax any more!</sarcastic silver lining>

So how much more will I be paying?

I'm not an accountant, and I never will be, so make sure that you look at any calculations here carefully and run your own numbers.

The fee payer will be responsible for deducting tax and National Insurance from your gross invoice value and then paying your company the net amount. This means

• Employers National Insurance will need to be deducted and paid to HMRC. Technically, this is paid for by the "employer" not the "employee" - the agency / client cannot just make the deduction from your invoice and pay it over. However, the 13.8% of gross that needs to be paid to HMRC needs to come from somewhere - the agency (who may well be on a margin of lower than 13.8% anyway) will need to find the money from somwehere. They could (should!) be asking the client for this money, but there is evidence that agencies have been pushing this cost in the other direction and expecting the contractor to pay for the Employers NI.
• Employees National Insurance
• Income tax

As a rough example, if you invoice £1500 a week then you will have to pay approximately £165 in employers NI, £330 in income tax, £90 in employees NI - leaving you with a take home of around £915.

Bear in mind also that the tax deducted will be based on the assumption that your income remains constant throughout the year, so when you are benched or on holiday and not earning, the calculations will not necessarily have been correct. Any tax deducted incorrectly will need to be reclaimed via Self Assessment.

If your employer (agency or umbrella company) has a PAYE bill of over £3 million a year, then they have to pay 0.5% of that bill into a government fund for apprenticeships. As with Employers NI this is another charge that should be met by the employer, but they only have two places to get it from - the client or the contractor. I expect to see this charge being another one that is pushed down to the contractor.

What about corporation tax or dividend tax?

Good news (!) - you don't have to worry about these any more. Since all income from the contract must be paid out as salary, your company cannot make any profit from the contract - so there is no corporation tax to pay from the income earned from your public sector work. Likewise, since you have no profit from this contract, you have no means to legally pay a dividend - so there's no pesky dividend tax to worry about any more.

Obviously, if your company has other income streams from non-public sector work then these streams will need to be taxed accordingly, but you will not have any corporation tax liability for public sector work.

What about my expenses?

That's the bad news. Apart from direct cost of materials used in performance of the services; and expenses that would have been deductible if the worker had been the client's employee, you can't claim any expenses from the company. The point has been made to Treasury and HMRC that if you have any other expenses for your company then you have no means to pay these, but there has not been any acknowledgement of this problem. If your company only does public sector work, but has to pay for mobile phones, internet, insurance, or anything else then I cannot see how the company can legally do this.

Can I pay into my pension plan still?

You will not be able to make company contributions to your pension plan any more, because your invoices will have had tax deducted before being paid. You can still make personal contributions, but will have to make these from your net salary and then claim the tax relief back via Self Assessment. You will not be able to claim back the National Insurance deducted from your salary, though, so your contributions to your pension are likely to decrease significantly.

Any other financial implications that you can think of?

As if all this wasn't enough, if you have children and are claiming child benefit (or someone in your household is) then that's likely to get his as well. Your salary will probably be much higher than it was before, and the moment you earn more than £50k a year your child benefit decreases. Once you earn £60k a year, it goes completely - so there's another hit there for you.

Oh, and one more possibility - if you earn over £100k then your personal allowance starts to reduce as well.

There may be other financial impacts, but that's probably enough to be going on with for now...

[TheFaQQer]

What are my employment options?

There are a few that I can think of:

• Stop working in the public sector
• Join your agency as an employee on their payroll
• Work via an umbrella
• Become an employee of the PSB
• Continue working via your limited company

Not all of these may be available to you, and some have more benefits than others.

Stop working in the public sector

As I said above, this is the only sure fire way to avoid the new legislation for the time being. Whether it is something that you can reasonably consider only you can answer.

Join your agency as an employee on their payroll

This could be the best option to pursue, but I think it's unlikely to happen except in certain particular circumstances. Working directly for the agency means that there isn't an umbrella company in the mix to take a cut, so you are likely to be better off in terms of take home pay if you work this way. However, few agencies will want to have a load of contractors working for them as employees, and aren't geared up for it - there are little benefits to the agency and lots of downsides.

Work via an umbrella

Using a reliable umbrella means paying an additional fee to them, but in return you become their employee and they will deduct the correct taxes and NI for you. If you use one that has been around for a while and has a good reputation, then they know what they are doing, and that should help reduce the chances of having problems - that doesn't mean that there is no risk, of course. Since they are your employer, they will be the one paying for insurances for you, so you won't have that expense to consider (which your company can't pay anyway because all your income is paid net now...)

One possible advantage of using an umbrella is if they will allow you to make contributions to their pension scheme via salary sacrifice. This would reduce the amount of tax you have to pay, whilst still allowing you to build that pension pot - you probably won't be able to pay into your own pension plan but you should be able to pay into theirs before tax and NI are calculated so there is a saving to be made there. Whilst it is possible for you to pay into your own company pension plan via an umbrella, I would be surprised if many umbrella companies would be prepared to offer this flexibility. If an umbrella says that this is not possible, they are wrong - the Pensions Advisory Service says

Although your employer may choose to contribute to your SIPP, there is no obligation that they do so

so it is certainly possible to do it, but your umbrella company doesn't have to allow you to make salary sacrifice contributions to the pension plan of your choice.

When choosing an umbrella, PLEASE choose a reliable, reputable one rather than one who promises you stupidly high returns. If it looks too good to be true, it probably is.

Become an employee of the PSB

This could be the ideal - the PSB wants to treat you like an employee, HMG wants to tax you like an employee, it's only fair to be an employee. Bear in mind that some (many?) public sector bodies would like to be able to increase their headcount, but just aren't allowed to in the first place - so this might not be an option. Even if they are willing and able to employ you, it is unlikely that they will be able to do so on your current rate (or anything similar to that).

Some PSBs may instead offer a Fixed Term Contract (FTC) whereby you are effectively an employee for a given period of time but don't get some employee benfits. Depending on your circumstances, you might really want to consider this if you are offered one - you still won't be able to claim expenses, but if there is a decent offer then you might want to consider taking it. For example, paid sick pay, 25 days paid holiday and other benefits can equate to an effective rate increase which makes it worthwhile thinking about.

Continue working via your limited company

In theory, this is possible, but I just don't see it lasting as a way of working in the public sector for much longer because of the headache that it gives to the fee payer. The client or agency would be responsible for withholding the tax and NI from your invoice and then paying that over to HMRC - why would they want to take that headache on when an umbrella company can do it for them (and push the cost to you)? I can't see an upside for the fee payer, but there are downsides that I wouldn't want to face if I was in their position (I also question how many agencies or clients are able to take this burden on, let alone willing). Additionally, as mentioned above, your options about paying into your pension via salary sacrifice are removed so there is little or no benefit to the contractor in working via their limited company.

If you are lucky (unlucky?) enough to find an agency who is willing to take you on inside IR35, in the public sector, via your limited company (and I'm not sure why they would take the downsides and none of the upsides) then you would continue to invoice the agency as normal. The agency invoices the client as normal. The agency, using your personal tax situation, will then calculate the tax and National Insurance that needs to be paid as if you were an employee. Once they have made that calculation, the agency will pay the net sum to your limited company, and the company can now forward that amount on to you. If the calculation of PAYE is wrong, then you will need to correct that and either pay additional tax or claim overpaid tax back from HMRC via your self assessment. You will not be able to claim back any National Insurance if this is incorrectly deducted.

FWIW, my opinion would be to not work via a limited company, inside IR35, in the public sector because of the complexity of relying on the agency to get everything right. You will also need to make sure that your limited company accounts are correct because the amount received from the agency will not match the invoice value. You will also need to ensure that the agency treats the VAT element of your invoice correctly, and that this is also accounted for properly.

[TheFaQQer]

What if my client retrospectively changes me from outside to inside IR35

(Please note - this is speculation on my part. I am not an accountant or lawyer, and you should take professional advice in this scenario)

Imagine you are outside IR35. You pay a low salary and dividends. You work in the public sector, and you have always seen the role as outside IR35 and paid the correct level of tax. Then your client tells you that the role is inside IR35 and they are making that decision retrospectively. What should you do?

Firstly (IMHO) you cannot change the dividend payments to be reclassified as salary. The dividend paperwork (including minutes) should have been prepared at the time, plus salary would need to have been declared on your RTI on or before it is paid to you as salary. So that option is out - but there is still PAYE and NI to pay.

Secondly, look at the contract between your company and the engager / fee payer if they have told you that they will recoup the unpaid tax and NI from your next invoice or otherwise demand repayment from you. I would expect that the client will look at the previous invoices and work out what tax and NI is owed. However, I think it is questionable that they could just take the money back from you either by demand or deducting from future invoices - your contract may allow this to happen, so check carefully. HMRC guidance here states that where

your employer or pension payer did not take reasonable care to operate PAYE and the error was not made in ‘good faith’. In describing a ‘failure to take reasonable care’, this means failing to follow proper instructions to deduct PAYE tax from your pay or by failing to use Tax Code notices issued to them. Not made in ‘good faith’ means that an employer or pension payer may have known that they were not deducting the right amount of tax from you but took no action to correct their mistake.

then the employee is not liable for the PAYE, it falls to the employer to pay it. Now clearly, the situation is slightly different in this case because you wouldn't be an employee and they aren't your employer, but it would be a very interesting test case to fight

My feeling would be that the past tax must fall to the client / fee payer because they did not take reasonable care and the error was not made in good faith, so the dividends already paid would be allowed, the fee payer should pay the tax, but from this point on future invoices will be paid net of income tax and NI.

If you tax me like this, how do I get my rights?

There are two possibilities here - you could be entitled to rights under the Agency Worker Regulations, or you could be entitled to employee or worker rights via an Employment Tribunal. Under the AWR, you might be able to argue for pay parity after twelve weeks and some benefits that are accorded to permanent members of staff. Whilst you are possibly unlikely to want pay parity (the permanent staff may be interested in fighting for it though!), it may be worth pushing for other benefits that you might be entitled to.

If your taxation is being brought into line with that of an employee then arguing for employee or worker status is something that contractors might be more inclined to pursue. Any contractor who feels that they want to consider fighting for this should take professional advice - this is likely to be a long fight so I would want someone effective in my corner, preferably someone with a track record of going as far as is legally possible to fight HMRC and to win that battle.

Is there anything else I can do?

Spread the message, talk to people, get involved, make sure as many people that might be affected by this are aware of what it means, help build a portfolio of real world examples where the rules are being applied incorrectly, seek professional advice on how to appeal a determination...

If you are interested in exploring whether you have the right to claim employment or worker rights, then there are people who are looking to take the fight as far as possible - no taxation without representation and all that.

[northernladyuk]

Great FAQqing.

[SueEllen]

Thanks TheFaQQer

[northernladyuk]

How will this affect the money in my pocket?

Make no bones about it - if you are inside IR35 then you will have less money in your pocket (or company pocket) than if you are outside IR35. You'll have lost the ability to claim travel and subsistence expenses, your 5% expense allowance, the ability to make company contributions to your pension, and you'll be paying National Insurance and income tax that you probably aren't paying now. <sarcastic silver lining>The good news is that you aren't affected by the dividend tax any more!</sarcastic silver lining>

So how much more will I be paying?

I'm not an accountant, and I never will be, so make sure that you look at any calculations here carefully and run your own numbers.

The fee payer will be responsible for deducting tax and National Insurance from your gross invoice value and then paying your company the net amount. This means

• Employers National Insurance will need to be deducted and paid to HMRC. Technically, this is paid for by the "employer" not the "employee" - the agency / client cannot just make the deduction from your invoice and pay it over. However, the 13.8% of gross that needs to be paid to HMRC needs to come from somewhere - the agency (who may well be on a margin of lower than 13.8% anyway) will need to find the money from somwehere. They could (should!) be asking the client for this money, but there is evidence that agencies have been pushing this cost in the other direction and expecting the contractor to pay for the Employers NI.
• Employees National Insurance
• Income tax

As a rough example, if you invoice £1500 a week then you will have to pay approximately £165 in employers NI, £330 in income tax, £90 in employees NI - leaving you with a take home of around £915.

Bear in mind also that the tax deducted will be based on the assumption that your income remains constant throughout the year, so when you are benched or on holiday and not earning, the calculations will not necessarily have been correct. Any tax deducted incorrectly will need to be reclaimed via Self Assessment.

If your employer (agency or umbrella company) has a PAYE bill of over £3 million a year, then they have to pay 0.5% of that bill into a government fund for apprenticeships. As with Employers NI this is another charge that should be met by the employer, but they only have two places to get it from - the client or the contractor. I expect to see this charge being another one that is pushed down to the contractor.

What about corporation tax or dividend tax?

Good news (!) - you don't have to worry about these any more. Since all income from the contract must be paid out as salary, your company cannot make any profit from the contract - so there is no corporation tax to pay from the income earned from your public sector work. Likewise, since you have no profit from this contract, you have no means to legally pay a dividend - so there's no pesky dividend tax to worry about any more.

Obviously, if your company has other income streams from non-public sector work then these streams will need to be taxed accordingly, but you will not have any corporation tax liability for public sector work.

What about my expenses?

That's the bad news. Apart from direct cost of materials used in performance of the services; and expenses that would have been deductible if the worker had been the client's employee, you can't claim any expenses from the company. The point has been made to Treasury and HMRC that if you have any other expenses for your company then you have no means to pay these, but there has not been any acknowledgement of this problem. If your company only does public sector work, but has to pay for mobile phones, internet, insurance, or anything else then I cannot see how the company can legally do this.

Can I pay into my pension plan still?

You will not be able to make company contributions to your pension plan any more, because your invoices will have had tax deducted before being paid. You can still make personal contributions, but will have to make these from your net salary and then claim the tax relief back via Self Assessment. You will not be able to claim back the National Insurance deducted from your salary, though, so your contributions to your pension are likely to decrease significantly.

Any other financial implications that you can think of?

As if all this wasn't enough, if you have children and are claiming child benefit (or someone in your household is) then that's likely to get his as well. Your salary is likely to be much higher than it was before, and the moment you earn more than £50k a year your child benefit decreases. Once you earn £60k a year, it goes completely - so there's another hit there for you.

Oh, and one more possibility - if you earn over £100k then your personal allowance starts to reduce as well.

There may be other financial impacts, but that's probably enough to be going on with for now...

In terms of other financial impacts, psychocandy asked me to ask you if it's easier to sign on now between PS gigs.

[TheFaQQer]

New section added above about retrospective changes of status and clients attempting to deduct tax and NI from future invoices, based on anecdotal evidence of this happening.