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IR35 and public sector clients: How to avoid a nasty surprise on your tax return

by Ashley Deakin | Apr 20, 2017
  • New legislation introduced in April 2017 means that the IR35 status for contractors working for public sector clients will now be set by the client and not the contractor. This has left many UK contractors working for public sector clients unsure whether they are within IR35.
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    Below are answers to important questions which should help you figure out when your contract with a public sector client falls within the scope of IR35 and what happens if it does.

    Click on the question below to be taken directly to its answer:

    1. How will a public authority determine if I am inside of IR35?

    2. If my public sector client deems my contract to be caught by IR35 from 6 April 2017, but previously I had considered it outside, am I automatically caught for earlier years?

    3. Do I have to accept the public authority’s decision that I am caught by IR35?

    4. Will my company be liable for PAYE and NIC arrears in the event of the public authority making the wrong decision?

    5. Will my income be taxed twice - once through PAYE and again through corporation tax?

    6. If I am being treated like an employee, will I be entitled to employment rights?

    7. If I have no right of substitution, will I definitely be caught by IR35?

    8. Given the fee payer is responsible for operating PAYE, does my company have to be concerned about Real Time Information (RTI) reporting?

     


     

     

    1. How will a public authority determine if I am inside of IR35?

    They are likely to use HMRC’s IR35 digital tool, known as the Employment Status Service (ESS). Although it is optional, it’s understood that most public sector bodies will automatically default to it. HMRC have stated that — provided the answers given to the questions are accurate — they will stand by the decision of the tool. 

     

    2. If my public sector client deems my contract to be caught by IR35 from 6 April 2017, but previously I had considered it outside, am I automatically caught for earlier years?

    Not necessarily, no. The public authority is likely to have made a decision by virtue of the ESS digital tool. This decision may not have taken into account all the status factors that were previously considered which would have presented a much fuller picture of the working arrangements.

    On top of this, HMRC simply does not have the resources to investigate every contractor in the public sector. As a result, they are likely to be much more selective as to those contractors they wish to take a closer look at before 6 April 2017. 

     

    3. Do I have to accept the public authority’s decision that I am caught by IR35?

    You may appeal against the decision. However, this will require making a claim for a repayment of PAYE tax and National Insurance Contributions (NICs), resulting in HMRC taking up an IR35 check which isn’t necessarily a course of action you might want to take!

    In practice, once a public authority has made up its mind that you are caught inside IR35 you have two options: You can either accept its decision and try to negotiate a better rate to compensate for any reduction in take home pay, or you can move on to the next assignment. 

     

    4. Will my company be liable for PAYE and NIC arrears in the event of the public authority making the wrong decision?

    New legislation provides for a transfer of obligations from the “fee-payer” to elsewhere in the contractual chain, but only in limited circumstances. This usually happens where the fee-payer is a non-resident and is controlled by the worker or someone connected with them, or where the worker provides fraudulent information.

    As the IR35 decision making process has largely been taken out of your hands, it would be grossly unfair to penalise you for a decision you had no influence over. 

     

    5. Will my income be taxed twice - once through PAYE and again through corporation tax?

    There will be no double taxation. A Person with Significant Control (PSC) can pay its worker up to the net amount it receives from the public authority, without any further PAYE or NIC consequences. The PSC will receive relief for employment income, tax and NIC costs. 

     

    6. If I am being treated like an employee, will I be entitled to employment rights?

    No. There is no direct link between employment rights and employment taxes. The entitlement to employment rights is based on whether you have an employment contract with an employer. 

     

    7. If I have no right of substitution, will I definitely be caught by IR35?

    Whilst this aspect of the personal service test appears prominently in the ESS/IR35 digital tool, answering “no” to a right of substitution does not automatically place a contractor inside IR35. The tool then moves to a series of questions regarding the right of control. Positive answers to these, along with other employment status factors, can still place a contract outside IR35. 

     

    8. Given the fee payer is responsible for operating PAYE, does my company have to be concerned about Real Time Information (RTI) reporting?

    A PSC’s obligations to report employment tax and NICs are largely the same as for deemed employment income. However, any amount of employment income paid that has been subject to a deduction of tax and NICs in this way should be recorded on a Full Payment Submission (FPS) as non-taxable income, with the gross taxable employment income recorded reduced accordingly.

     


    If you have any queries related to working in the public sector as a contractor send our accounting team an email on accounting@sableinternational.com.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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