Under the new rules, the public sector body is required to determine the IR35 status of an engagement. They are being encouraged – it is not an obligation – to use an HMRC Status Indicator Tool, which isn’t yet ready and in which most on this side of the fence have no faith.
If an engagement
is deemed ‘caught’ by IR35, PAYE needs to be deducted; by the public sector body if the engagement is direct, but if there are agencies (or other intermediaries) in the chain, then the agency closest to the contractor’s (personal) service company (PSC) must make the deductions.
The public sector body (for a direct engagement) or the closest agency to the PSC making the deduction is the ‘fee-payer’, and is responsible for the liability should the correct amount of tax and NICs not be deducted.
An agency has a statutory right to require a public sector body to explain the reason for its decision and the body must reply in 31 days.
Finally, a point that is perhaps being overlooked: current engagements in the 2016/17 tax year are not subject to these rules. However, invoices raised, say in the first quarter of this year, where payment is made on or after the 6th April, will require the public sector body to consider the current engagement under the new rules!
So what is the message from the public sector bodies?
From correspondence received and discussions with agents and contractors, we understand:
- The BBC has warned all limited company contractors they may not be able to operate PSCs after April; Channel 4 has advised contractors that they are all going to be paid PAYE, but is looking at increasing rates to compensate for the additional tax contractors will pay
- The MOD wants everyone to go PAYE
- The education sector is closing its doors to engagements that are “outside of IR35” – it will only take on umbrella or deemed employment PSCs
- The railways – specifically, Transport for London (TfL) and Network Rail – are saying ‘no’ to limited company contractors
- As have some Housing Associations.
The reaction of contractors to the new rules may determine the steadfastness of a particular body’s adherence to this ‘no-PSC approach’ which appears to be taking hold. If ‘no PSCs’ actually results in no contractors, we may see a very quick shift, as the completion of projects is endangered.
It is an incomplete and varied picture. Both contractors and agencies really need to be talking to the public sector body engager now to understand the lie of the land – not least because some engagers like TfL want everything sorted out by Friday 17th February – and that’s coming up very fast. So, what do agencies and contractors need to be doing?
Our thoughts on the matters for agencies to consider are as follows:
- Dialogue: Talk to their candidates to understand how they will react to a blanket ‘no-PSC’ approach (as has been indicated by TfL and others). Whilst we are aware that some contractors will accept their new status, a good number won’t.
- Feedback: TfL, who were one of the first to say they would no longer be dealing with PSCs in the new tax year, have said that if the individual is critical to TfL, all options will be reviewed in order to retain their skills and deliver the work required. So, is this approach just designed to reduce the burden on a public sector body by reducing the number of decisions it has to make? We believe agencies need to start testing the resolve of some of the public sectors body engagers by feeding back how their PSC contractors will react.
- Current Engagements: Can invoices for Q1 2017 be expedited and paid by the public sector body before 6th April so that the new rules do not need to be considered? If not, then to be on the safe side perhaps it makes sense for agencies to deduct PAYE (under RTI). If so, agencies will need NINOs and other information from the contractor to make payments and report the information correctly under RTI.
- Establishing the IR35 Status post April 6th: Agencies need a clear understanding of the reasons why the public sector body has arrived at its decision, particularly if the answer is ‘not caught’. And you can’t wait the statutory 31 days for that information; the engagement needs to be filled quickly. You might even have to pay the PSC before you have the written detail. If you haven’t been given the reasoning, you will again want to err on the safe side and pay via RTI, net of tax and NICs. The public sector body really needs to provide its decision as part of the contract. Not least if the decision is ‘caught’ because then you may have a big selling job to convince your candidate to take the engagement. But what information will you want to see? And can it be sure the status decision is correct?
- The decision is ‘caught’ by IR35: What options do your Limited company contractors have? No doubt all will request a rate rise to compensate for the additional tax payable, but we know that some bodies – the NHS for example – have fee caps. So either the rate is not going to be achievable or it has to come out of somebody else’s margin. Whether rate rises are achievable or not, how many contractors will want to remain trading as a PSC beyond the end of the PSC’s financial year, if they consider that it is not worthwhile paying the compliance costs of running a company? If they close their companies, is your agency client geared up to paying individuals as agency employees? If not, do you have a relationship with an umbrella company or other intermediary?
- The decision is ‘not caught’ by IR35: What if HMRC subsequently challenges that decision and is successful in arguing that the engagement was ‘caught’ and PAYE should have been deducted by the agency as the fee-payer? The agency is then liable. Yes, there will no doubt be a clause in the contract with the PSC to recover the liability; but what happens if the PSC is no longer there?
So what can agencies do?
Systems need to be in place to understand the decision a public sector body has reached and if the information is not quickly forthcoming, how you will pay the first payment to a PSC. You will need to be able to capture the necessary information to process RTI payments and how to deal with payments on engagements crossing the 5th/6th April needs to be considered.
The thorny issue of liability needs to be addressed by the ‘fee payer’ agency.
Accountax has developed a process and insurance to protect agencies from this scenario. It will not only pay the defence costs to fight HMRC’s challenge, but also meet the tax and NIC liability should HMRC be successful. It will also allow PSCs to purchase additional cover to protect against retrospective action by HMRC or pursue HMRC for a claim for overpaid tax and NICs (see below).
Please ring 0345 0660 035 or contact firstname.lastname@example.org to find out more.
Contractors need to talk to their end clients if directly engaged and, if not, their agencies and consider many of the same issues. If not engaged directly to the public sector body, then it is the agency whose job it is to establish how the land lays. Nevertheless, we would also suggest that you also talk to your end client – after all, you are the two parties at the coal face – to establish whether you are an ‘individual critical to the organisation’, so that you can weigh up your options.
Many contractors will have undertaken contract reviews with organisations like Accountax and Abbey Tax in order to provide “tax assurances” for your public sector engager. Whilst the new IR35 rules in the public sector suggest these reviews are unlikely to be required in the future, we can see one situation where they could be relevant: appealing against the decision made by the public sector body concerning the status of your engagement, or at some later point to HMRC to recover tax and NICs that you believe you have overpaid. Then a contract review would be a crucial part of your body of evidence. Indeed, you may also want the services of a status specialist to help argue your case.
Retrospective action from HMRC
The scenario concerning contractors is what will happen if a current engagement for which tax assurances have been given and accepted, is deemed caught by IR35 under the new regime. This is going to be particularly relevant if public sector bodies are taking the ‘no PSC’ approach from the 6th April onwards.
A number of contractors have asked whether acceptance that PAYE will be deducted in the future somehow undermines the tax assurance process; and will HMRC pursue the contractor for the period leading up to the 5th April 2017? The honest answer is that we don’t know, although we feel that HMRC will have enough on their plates to police the new system. If from their perspective, the new rules deliver greater tax revenues, then they may be happy to let sleeping dogs lie.
So what can contractors do?
Anyone who is concerned about retrospective action should consider both tax investigations insurance to protect themselves against the costs of an IR35 investigation and consider tax losses insurance to protect against the tax loss for current and past engagements which end on or before 5th April 2017.
We assume that contractors will have already provided tax assurances for current engagements, but if not, then we can undertake a contract review for you. This will look at both the contractual terms and the working practices to provide an opinion on your IR35 status. The review has the further benefit of demonstrating due diligence, which would mean that if HMRC did investigate any engagements and were successful in arguing IR35 applies, then the due diligence of the contract review will undermine HMRC’s efforts to apply a penalty to the tax due.
Lastly, if your enquiry involves tax losses insurance, then the contract review serves as the MOT which enables us to offer the cover to protect your tax position as well.
If you would like to know more about the contract reviews and tax losses insurance, please contact us on 0845 0660 035 or email@example.com to find out more.
Author: Paul Mason, National Contractor Manager
E mail: firstname.lastname@example.org