In the 2016 Autumn Statement, the Chancellor Philip Hammond announced that new rules would apply to “off-payroll working” in the public sector from April 2017. Essentially this tax reform is the next step of tightening up the rules around intermediaries, usually known as IR35.

These rules were consulted on in the summer of 2016, and we responded making clear our serious concerns about the feasibility and negative impact of such plans.

We were by no means alone in expressing such concerns – most professional bodies and even the Treasury’s own Office for Tax Simplification raised serious worries.

How are contractors affected by public sector IR35 changes?

The Government is shifting liability from public sector contractors to the engager – whether that’s a government department, agency, or consultancy working for the public sector.

Crucially, this only applies to contractors working as limited companies in the public sector.

To support the process of deciding whether a contractor’s engagement falls within these rules, HMRC has developed an online IR35 tool.

The tool can be used by workers, engagers, and end clients, and covers both private and public sector contracts. HMRC states that it will “stand by the result given unless a compliance check finds the information provided isn’t accurate.”

What happens if the rules apply?

If the rules apply, Income Tax and National Insurance will be deducted from the contractor’s invoices and paid through payroll like a PAYE employee. There will then be a process to reconcile the invoices and payroll to ensure there isn’t double taxation. The contractor won’t pay Corporation Tax on whatever comes through as payroll.

During the consultation, HMRC had proposed that 5% of invoice value would be a tax-free allowance to cover the costs of running a business. However, this was not agreed by the Chancellor, so all billing that falls under the rules will be fully covered by payroll taxes as if the contractor was an employee.

We’re campaigning for you

We’re keeping up the pressure on the Government to reconsider its stance on public sector contractors. Whether this is a precursor to similar changes for private sector contractors remains to be seen. Join our free Crunch Chorus community to stay updated.

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