IR35 Accountants Approach – Public Sector Contractors
HMRC have this month revealed an overview of public sector IR35 reforms that outlines changes that have been controversial for many contractors in the public sector. The Accountancy Solutions as IR35 accountants in Birmingham and London bring you an overview and history of IR35 with a proactive approach to deal with the tax man.
What is IR35?
IR35 is legislation from HMRC that rules and affects contractors who do not fall under the category of “self-employment”. HMRC announced that on April 6th, IR35 will come into force and could see many contractors suddenly hit by increased taxation. In some instances, it’s already seen contractors lose their jobs as public sector bodies try to force out private service companies to avoid being liable for IR35 mistakes.
IR35 states that contractors will in fact lose the right to decide if IR35 applies to them and that the third-party or agency who pays them, should decide their status instead. This essentially means that the public sector body will be responsible for defining and deciding a contractor’s status.
IR35 status would see contractors becoming liable for National Insurance as well as Schedule E-taxation, likely causing havoc for contractors own tax arrangements and hurting their bottom line.
Why is this important in the Public Sector?
This is crucial for the vast amounts of contractors who work in the public sector – from locum doctors to IT contractors. HMRC estimates that this should only effect 20,000 contractors, but other sources put the figure closer to 50,000. The logistical and HR issues that IR35 present could be detrimental to the Public Sector and the way it manages employment in years to come.
Overnight contractors could see additional taxes raised against their turnover and their business models challenged. Unfortunately for contractors, they would be forced to pay tax just like any other employee, but instead without the usual employment rights. As such they would pay the same amount, but not gain the rights and benefits such as unfair dismissal, annual leave pay or pension contributions, as actual employees enjoy.
The changes are also important as the ruling is so complex and open to interpretation that it is likely to cause a real headache for not just contractors, but agency and clients as well.
Under IR35, the burden of responsibility to classify the contractor is usually the agency. However, many agencies lack an understanding of the working practices so would likely need to ask the client directly. Under IR35, the client is obliged to provide a response and decision within a 31 day period. If the wrong determination is made and a contractor is found to be IR35, then the client/agency is liable for this mistake. Many public sector contractors worry that because of this pressure, the easiest option for clients/agencies is to simply apply IR35 to all of their contractors and see which ones try to fight back.
Public Sector Bodies
For PSBs, there is a real risk that many of their contractors may simply end their contract and move on if they feel under risk of investigation. This could have a detrimental effect on business operations and could see costs soar as PSBs try to plug the gap left behind with new employees and staff – many of which we’re already in short supply!
Will the Public Sector be able to make the right decision on IR35?
If you consider how many contractors work for a major public sector body like the NHS, then the logistics of such a task are unfathomable. Most public sectors teams lack the necessary experience and understanding of case law to make a reasonable decision.
Combined with the fact that each contractor is likely to have varying working practices and contracts, each case could be incredibly time consuming for the review team to assess individually.
To add further insult to injury, the IR35 legislation is so complex on its own that it’s likely to cause problems even trying to interpret the document. As such, it’s no surprise to see suggestions that public sector entities will apply IR35 and force compliance from their contractors.
What can contractors do about IR35?
There are a number of options and guidance available to contractors worried about their position on April 6th. We’ve highlighted the most important below:
• Firstly, understand if you’re likely to be classed as employed or self-employed under HMRC’s own guidance. If in doubt, speak to a tax accountant such as ourselves for reassurance. HMRC is releasing a public digital tool online (in beta) on February 20th 2017 to help contractors determine if they are within IR35, so this should provide some clarity.
• Look to see if you can rearrange your contract to meet “self employed” status – adjust your working practices so these are more in line with the HMRC definition. If taking on new contracts, ensure that your employment status is outlined in the contract before signature – this will protect you should your client/agency look to reverse their decision.
• Seek contract work abroad – for many this may be the chance to work internationally to avoid additional taxes.
• If you’re invoicing on 30 days terms, send any outstanding invoices before 6th March 2017 to avoid any penalties under the new tax rules.
• Leave – if you’re put in a position by your agency/client, the only decision you may have is to end the contract.
What should contractors do if they are subject to pay tax under IR35?
The first thing for a contractor to do is not to panic. If your public sector body has declared you IR35 that doesn’t mean that you’re now open to a full HMRC investigation. Past contracts and work aren’t included in a review and realistically, HMRC only has enough resource to manage a relatively low number of IR35 cases in a year. However, that doesn’t mean you can put your feet up and relax.
• Collate, organise and continue to record all interactions, contracts, expenses and communication that will help aid your cause. The sooner you can present a professional and thorough set of information to HMRC, the higher your chances of success are. Work with your tax accountants to find out what you need and when it needs to be provided.
• Contractors will be granted a right to appeal a declaration and can ask for a review of the decision in order to start proceedings and gain further time.
• It is advised you speak with a tax specialist (we can help as a prominent tax accountant in Birmingham and London) to help you through this process. As already mentioned, IR35 is incredibly complex and could have massive consequences on your business. Seek expert advice so that you can get reasoned and impartial recommendations on what your next steps should be.
• Speak to your public sector body, or ask your advisor to act on your behalf, to see if they can reverse the decision. It could be that your contract was dealt with by someone who is unaware of you, your business and working practices and therefore could be incorrectly viewed.
• If you fail to get HMRC on your side then you may then need to formally take the case before the first tier tax tribunal. However, be aware that this could be costly and stressful battle to take on for both you and your accountants.
Want to find out more information?
If you’re declared IR35 or want to find out more about how it could affect your business, please don’t hesitate to get in touch with us. We’re a robust and friendly tax accountants based in London and Birmingham and can help with all matters of tax related issues. Contact The Accountancy Solutions on 01216297768 or 02070784001 and we can start with practical and clear guidance around IR35.