With the date for the Autumn Statement now set for 23 November, chancellor Philip Hammond will want to steer a steady course for post-Brexit Britain.
The big question on contractors’ lips is, ‘How will the public sector IR35 reforms affect us and the industry moving forward?’ We present the facts and the potential fallout from the draconian new rules.
Following the announcement of the public sector IR35 proposed changes in the 2016 Budget, the government released its ‘Off-payroll working in the public sector – reform of the intermediaries legislation’ consulting document on 26 May. This gave the contracting industry and affected parties until 18 August to respond with draft legislation expected after the Autumn Statement.
The new rules stipulate that it will no longer be up to contractors, who offer their services via personal service companies (PSCs) in the public sector, to assess their IR35 status. The responsibility and liability for compliance will fall to the engager (public sector employers, agencies or third party employers, including consultancies and outsourcing specialists). Those contracting in the private sector are not affected.
Big financial hit for contractors
What will this actually mean? Should the proposed changes go through, contractors working in the public sector will be subject to higher rates of income tax and National Insurance contributions (NICs). If that wasn’t enough of a hammer blow, there is no entitlement to employee benefits, such as holiday and sick pay, and the public sector body benefits from a 5% allowance (to cover such costs as training and looking for contracts). This amount is deducted from the contractor’s gross pay. The PSC still assumes responsibility for VAT.
The upshot is that there is a danger that engagers could bring many contractors inside IR35, especially those deemed to be fulfilling a similar role in a similar capacity to their own full-time staff – effectively removing the extra administrative burden of assessing for IR35 status. Limited company contractors could be forced to use PAYE umbrella companies so that engagers can avoid meeting their proposed Real Time Information (RTI) tax collection and reporting process obligations.
Hammond recently told European finance ministers that corporation tax would remain at 20%, albeit a reduction to 17% could be expected by 2020. This will come as scant consolation to contractors who had been promised by previous chancellor George Osborne that the rate would come down significantly to 15%, a move that was seen as a ‘sweetener’ to attract businesses to the UK following the ‘Leave’ vote in June. Let’s not forget that limited company contractors have also been hit by new dividend tax rules, so this double whammy is yet another bitter pill to swallow.
Contractor status under growing scrutiny
The Committee of Public Accounts, which ensures transparency and accountability of government expenditure, has long been on a mission to ensure that Whitehall does more to establish the tax status of their contract workers in a bid to clamp down on ‘disguised’ permanent workers. Although HMRC is consulting on a controversial new tool that will help clear up the status question, many specialist contractor accountants and tax experts remain sceptical as to its effectiveness.
Despite lots of opposition from the contracting industry, there seems to be no stopping the government in its bid to claw back the tax benefits of limited companies and recoup some of the estimated £400m that PSCs outside IR35 save annually. Public sector departments are already coming under increasing scrutiny – as of December 2016, external recruitment requirements will need to be regularly reviewed as part of new five-year strategic workforce plans that will detail the skills gaps that contractors are being hired to fill.
Perhaps the only ray of sunshine is that a growing number of people are becoming self-employed and that the market for skilled independent professionals is in healthy shape.
Demand for temporary umbrella company employees and contracting professionals post-Brexit has remained steady. The Office for National Statistics (ONS) also revealed in its latest year-on-year employment bulletin report that the number of freelancers had risen by 224,000.
Many commentators expect that the adoption of the IR35 public sector reforms introduced by previous chancellor Osborne are a mere formality and will come into effect on 6 April 2017. Where that will leave the contracting industry only time will tell but what is clear is that contractors will be severely out of pocket.
The very existence of the limited company contractor is under threat and the big fear is that in time these reforms will also apply to the private sector. Philip Hammond’s first fiscal update is not likely to bring a great deal of Christmas cheer.
So how much will I need to increase my day rate by, in order to not be out of pocket as a result of these proposed changes ?
I have stated this elsewhere: There is a simple way to deal with this, and that is to assume that any Public Sector contract will fall under IR35. Work out your after tax pay outside IR35, then work out what your rate will be inside IR35 to get the same after tax. Add a small buffer for the inconvenience, and quote that rate for any public sector work. They can accept, or they can do without your services.
Yes, the government will get more tax, but they will be paying it themselves. If all contractors stick to this, they will gain nothing, and probably loose money overall due to the additional overhead burden.
All this effort for £400m
Go after Apple instead
There is another strategy that removes all of the doubt, uncertainty, inconvenience and cost. Public sector contract? No thank you.
Anyone who believes IR35 is to raise more tax is delusional. The agenda is to rid the IT industry of contractors so more people from the sub continent can be brought in to boost the coffers of companies like ITC. Where else are ministers to get seats on company boards after they leave office?
[quote name=”John”]So how much will I need to increase my day rate by, in order to not be out of pocket as a result of these proposed changes ?[/quote]
John the total percentage you need to be looking at is ….go work for the Private Sector%.
The Public sector can increase rates but I suspect they will drop their role standards instead.
Calculating this is a massive headache (I have many spreadsheets), not just because of tax but Employers NI. This whole process has effectively given public sector bodies a way to employ people without any benefits or liability to play employers NI – It’s a scam. Karl is correct about calculating wages, but it’s just another massive admin burden to worry about and makes tax planning for time working and not working (I currently spread my salary out across the year) almost impossible. This is insanely complex. A much better strategy is to drop IR35 entirely and restrict all limited company directors to taking only a percentage of dividend that is linked to their salary to ensure that income is adequately split and allow for business investment.
[quote name=”Anakim Hemelloper”]Anyone who believes IR35 is to raise more tax is delusional. The agenda is to rid the IT industry of contractors so more people from the sub continent can be brought in to boost the coffers of companies like ITC. Where else are ministers to get seats on company boards after they leave office?[/quote]
What saddens me is this isn’t being more widely reported.
The public sector will still have the need for skilled workers to plug their skills gap. If they can’t get contractors they will get the likes of Capita, Computacenter, IBM, HP etc. to fill that gap instead. Giving all this nice juicy work to these companies means a nice warm seat at the board room table for (ex-)ministers.
And as these companies have departments full of accountants the tax revenue that will be generated will be less than the £400M that contractors some how earm outside of IR35 (where on earth does this figure come from???).
This isn’t about tax. It’s about money. Money for the ‘right’ people. The Public Sector damage is collateral.
Thinking if enough contractors go to the private sector due to this then the legislation will then be extended to cover the private sector to level the playing field. So effectively two options, contractors will accept the increased costs, contractors will pass on the increased costs. I believe one to be more likely. So in effect all this new legislation will do is make contractors a lot more expensive across the board. But hey the tax man will get a bigger cut.
[quote name=”Dan”]Thinking if enough contractors go to the private sector due to this then the legislation will then be extended to cover the private sector to level the playing field. So effectively two options, contractors will accept the increased costs, contractors will pass on the increased costs. I believe one to be more likely. So in effect all this new legislation will do is make contractors a lot more expensive across the board. But hey the tax man will get a bigger cut.[/quote]
For a start, why do ‘public sector’ contractors think they’ll just walk into private sector contracts? You get stereotyped easily in this game and I think many public sector contractors are going to struggle to find work in the private sector.
As for contractors ‘becoming’ more expensive due to the changes, dream on.
Where would corrupt politicians be without their plethora of advisors and contractors? I agree, this is a way of hitting those of us who work independently of the big consultancies. What a shocker. Personally, I’ve reached the stage where I no longer have to work, but it’s a shame because I’ve seen just how quickly and well interims can lend instant expertise and effort to an organisation. I for one will think twice about my future working arrangements.
[quote name=”Keith”]Calculating this is a massive headache (I have many spreadsheets), not just because of tax but Employers NI. This whole process has effectively given public sector bodies a way to employ people without any benefits or liability to play employers NI – It’s a scam. Karl is correct about calculating wages, but it’s just another massive admin burden to worry about and makes tax planning for time working and not working (I currently spread my salary out across the year) almost impossible. This is insanely complex. A much better strategy is to drop IR35 entirely and restrict all limited company directors to taking only a percentage of dividend that is linked to their salary to ensure that income is adequately split and allow for business investment.[/quote]
Must admit I always thought that if all companies (all – not just small ones) were limited to paying dividends equal to total salary then theres no need for IR35 and a lot of other legislation as well. Keeps things nice and simple and no grey areas but its not often that “nice and simple” and tax get mentioned in the same sentence.
Can someone tell me please, is it better to go ‘Ltd inside Ir35’ or umbrella ?