Contractors' Questions: What if I'm deemed inside IR35 from Thursday?
Contractor’s Question: If my public sector client changes its mind and decides I’m inside IR35 from this Thursday (April 6th), how much would my pay need to increase to nullify it? And will I be taxed twice, as my PSC pays me, but the agency will now also deduct PAYE and NI?
Expert’s Answer: Based on the loss of the Flat Rate VAT saving and being found inside IR35, we have calculated that a rate increase of between 20 and 35% will be necessary. For instance, a day rate of £200 per day needs to increase to £270 and £350 will need to increase to £420.
The following table looks at these rates when caught by IR35 and conversely, when working through an umbrella company. Note; the below examples assume that the new Flat Rate VAT of 16.5% applies and that there are no allowable expenses claimed.
Inside IR35 operating through a limited
company, post-April 5th
|Contractor on £200 per day||£2,791.36||£2,831.85|
|Contractor on £350 per day||£4,470.97||£4,481.02|
Regarding double-taxation, you do not need to worry. The fee payer, either your agency or the public sector body will deduct PAYE and NIC from the payment made to your limited company. This payment will be reported to HMRC on an RTI submission through the fee-payer’s payroll reporting. YourlLimited company will receive the net funds and you will withdraw these as salary. Your company will also need to record the payment of salary in their payroll records and submit an RTI submission, but you will identify the payment as being non-taxable since PAYE and NIC have already been deducted, hence there will be no double taxation.
Lastly, I note that your question implies that the public sector body you supply has told you, for now, that your assignment is outside IR35. You should be reassured that it is highly unlikely that HMRC has the will, resource or need to open an investigation against your company. That said, it would be sensible for you to confirm that the client’s decision is supported by the ESS as this provides you with ‘safe harbour’ or, if not, an independent IR35/contract review. However, if you are aware of any information, or if you supplied information that might have led to an incorrect determination, you should let your client know.
The expert was Dan Moss, a director at contractor accountants Orange Genie.
Editor’s Note: This is the first part of a new Contractors’ Questions series based on questions posed in a ContractorUK webinar on the April 6th off—payroll rules.