Contractors' Questions: Which tax code if inside IR35 in the public sector?

Contractor’s Question: In this ContractorUK article on IR35 in the public sector, the expert says that tax code BR should be used by a fee-payer when calculating deductions to a contractor, meaning a flat 20% deduction regardless of how much is paid ( i.e. higher tax rate is not applied over £866 a week ). Can you point to the legislation or guidance that verifies the expert’s statement please, so that I can set my agency straight?

Expert’s Answer: HM Revenue & Customs have issued guidance for agents and fee-payers in light of the off-payroll legislation. The guidance is here.

In a situation where a deemed salary calculation and fee-payer deduction is needed, the contractor is deemed to be an employee of the agency. Section 11 clearly sets out the process to be followed in relation to applying the correct tax code, when a contractor becomes an “employee” of the agency for the first time.

HMRC guidance applies basic PAYE rules and states that the fee payer/agency “will ask the worker to sign a Starter declaration C for workers engaged through their PSC. The worker will have a primary employment with their own company so the services they provide are treated as a secondary employment.”

Since this employment is deemed to be a second employment, the BR tax code will need to be operated and basic rate tax deducted until and if HMRC issues a new tax code. Issuing a new tax code will be complex for HMRC, especially if more than one employment or deemed employment exists. It is very likely that you, the contactor, will need to reconcile your tax position at the end of the year on your self-assessment form but -- by then -- you may have suffered cash flow issues in the meantime.

The expert was Helen Christopher, operations manager at contractor accountancy firm Orange Genie.