Presently, come April 2017, public sector clients will be given the responsibility of assessing the employment status of any contractors working for them.
Clients will be tasked with determining whether or not the contracts between contractors and the public sector body fall inside or outside the IR35 legislation.
Contractors deemed to be ‘inside IR35’ will have PAYE (Income Tax) and National Insurance deducted from their gross pay at source (via the agency if there is one in the chain).
Unsurprisingly, the financial cost of those caught is significant – even after taking into account the April 2016 dividend tax hike, which reduced the tax benefits of incorporation.
The change was confirmed in the 2016 Autumn Statement with HMRC releasing draft legislation on 5th December 2016 alongside a technical note providing further details on how IR35 will be operated in the public sector. To the surprise of many the document stated that it will be the client, not the recruitment agency, which will be responsible for determining IR35 status.
This is not only of great concern to contractors working for public sector bodies, but limited company contractors in general will be aware that the private sector could be targeted next if the initial legislation is deemed to be a success.
A petition against the off payroll changes has been launched entitled ‘Scrap IR35 legislation reform proposals for public sector off-payroll workers’.
The petition’s creator says that the new rules “will severely reduce the income of such individuals but confer none of the rights and benefits of a staff employee.”
This is true, of course; limited company workers caught by the rule change will have to bear all the costs of running a company whilst bearing the same tax rate as if they were an employee.
What is it thought that contractors find themselves having to pay for? Let’s look at a, not exhaustive, list of what this could entail.
Professional Indemnity Insurance
Training Costs (e.g. Microsoft certificates)
Software and Hardware costs
Cost of accommodation when away from home
Travel costs whilst on business.
What happens next?
Once a petition has collected 10,000 signatures, it will receive a response from the Government… and if 100,000 people sign a petition, it will be ‘considered for debate’ in Parliament.
In September 2015, a petition against punitive dividend tax changes was launched – it received 58,293 signatures, which merited a three paragaph response from the Government. The dividend tax hike went ahead, unchanged, in April 2016.
Contractors hope that this time around things will be more successful and Parliament will reconsider these wildly unpopular changes.