IR35 reforms to go ahead

Nov 29, 2016


By Lyndsey Hall

One of the key announcements that came out of last week’s Autumn Statement was the IR35 reform concerning public sector bodies. Changes to the way intermediaries and public services companies (PSCs) interact with the public sector were mooted in the Budget 2016, and despite opposition from IPSE and other organisations, the government intends to proceed with the changes.

In a nutshell, from 6 April 2017 the responsibility for IR35 will shift from the intermediary or PSC to the public sector body or agency that pays the contractor’s limited company. This means the responsibility for assessing eligibility and deducting any resulting tax from payments made to the limited company will be transferred.

The government also intends to remove the 5% administrative expense allowance for PSCs.

The main concern with the proposed changes is that public sector clients could pay all of their contractors as employees in order to avoid any penalties for non-compliance. This would result in contractors being taxed as employees, but with potentially limited employment rights, such as holidays, statutory rights or a pension.

The only consolation is that private sector contractors will not be effected.

HMRC is developing a digital tool to help public sector bodies and their agencies to assess the PSCs that they engage with, to check if IR35 applies. If so, they are proposing that the public sector body or agency apply tax and national insurance deductions to the payments made to the PSC’s, reported to HMRC under Real Time Information (RTI) system.

The public sector body or agency will be also be responsible for paying the liabilities deducted to HMRC. A tax credit will be applied to the director/shareholder(s) for their personal tax liabilities, and as such, the guidance proposed states that the corporation tax liability of the PSC would remain unaffected.

As the proposed legislation is still under consultation, HMRC has yet to issue guidance on the detailed points of the new rules. More information will hopefully be forthcoming in the Finance Bill 2017.

What do you think of the government’s proposed reforms? How will these changes affect your business? Let us know in the comments or join the conversation on Facebook and Twitter.

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