From 1ST April 2017, if your client is a public sector body, they will become responsible for implementing the changes to the IR35 rules. Public sector bodies are those which are subject to the Freedom of Information Act provisions and include the following (and are not limited to) the NHS, Local councils, government departments and maintained schools and further and higher education institutions, for example.
Your client decides your IR35 status
From 6th April 2017, your client together with your agency (if you work through one) will have the responsibility for making the decision whether to apply PAYE to your contract income based on their view of the IR35 status. This means that the public sector body and agency will be legally required (from 6 April 2017) to consider whether your contract is one of an employed person rather than one of self- employed contactor. This is a departure from the existing legislation, where as director of your limited company, it is your responsibility to consider your employment status.
If you are inside IR35, whoever pays your sales invoice is obliged to deduct Income Tax and National Insurance
It is the fee payer (which can either be your client if you are paid directly by the public body, or your Agency) who must deduct PAYE and National Insurance from the value of your sales invoice when it is paid if they believe your contract (for that assignment) is caught by IR35. The fee payer is also obliged to pay over Employers National Insurance to HMRC. HMRC have also advised that the 5% tax-free allowance which normally applies for IR35 will not apply.
If you are registered for VAT, you will still receive the VAT element of your sales invoice so that your VAT Liability is calculated as normal.
If you are working on assignment in the public sector, then from 6 April 2017, the IR35 status decision and associated tax implications are taken out of your hands. This may result in the agency or client coming to a different view on your IR35 status than you or us, this will depend on their process for assessing status. If your client or agency believe that the assignment, you are working on is caught by IR35 then the funds that your company receives will be net of Income tax and National Insurance as this will be deducted at source. If this were to happen, we would expect that as long as you do not withdraw amounts in excess of the net funds received (excluding any VAT), there will be no further tax to pay in respect of this contract. However, it is important to note that being paid in this way is not as tax efficient as withdrawing dividends from the company on the basis that IR35 doesn’t apply.
The legislation change does not preclude you from working through a limited company to deliver you services to the public sector and Brookson will be able to continue to provide accountancy services to your company. It does however potentially increase the tax you pay (depending on your client’s view on your IR35 position).
Public sector bodies and agencies will no doubt be reviewing their processes to ensure they meet the requirements of the new legislation and you should look out for updates from them or proactively ask them for an update before 6 April 2017.
Options available if you work wholly in the Public Sector
In general, the tax regime for contractors working in the public sector is changing, this may result in you considering whether to continue to work within the public sector or whether to look for assignments in the private sector (which will be unaffected by these changes).
If you are working or intend to work wholly within the public sector for the foreseeable future and your client has determined that the IR35 rules apply, then having your own limited company becomes less attractive from a take home pay perspective and you may wish to consider other ways of working.
Alternatively, if you are working in both the public and private sector, then working through your company is likely to continue to be tax efficient when compared to other ways of working.