IR35 Changes from 6 April 2017
If you work in the public sector directly through your own limited company or via an agency, then you need to be aware of the IR35 changes from 6 April 2017.
So what are the IR35 changes from 6 April 2017 and how might they affect you?
IR35 - an overview
IR35 came into effect in April 2000 and was introduced to tackle those individuals who were providing their services via a limited company (known as a ‘personal service company’) in circumstances where had the company not existed they would have been taxed as employees.
IR35 is also known as the ‘intermediaries legislation’.
Trading through a limited company has significant tax advantages – for example, dividends are not liable to national insurance whereas salary is. So if you are trading through a limited company and are caught by IR35, all payments to you will be reclassified as salary by HMRC and taxed accordingly.
IR35 changes from 6 April 2017
Prior to 6 April 2017 the responsibility for implementing IR35 largely fell on the individual's limited company (personal service company) or agency. And it was the individual's limited company or agency who was responsible for accounting for any tax and National Insurance due correctly where IR35 was applicable. However HMRC has struggled to enforce these rules in many cases often because the personal service company - PSC for short - or agency had been wound up before HMRC realised that IR35 was applicable.
The IR35 changes from 6 April 2017 shifts the responsibility for ensuring IR35 is correctly implemented in the public sector to the public sector body - rather than the agency or PSC.
So in future public sector bodies will need to decide whether any contracts they enter into with PSC's or agencies are subject to IR35. (This will also apply if they make payments after 6 April 2017 which relate to a contract dated before 6 April 2017).
If the relationship with the public sector is deemed to be caught by IR35 then the following will apply:
- The public sector engager or agency will be treated as the employer for tax and National Insurance purposes
- The amount paid to the worker's intermediary for their services is regarded as employment income or of earnings for NIC purposes of that worker
- The public sector engager or the agency will be liable for Employee's NIC and must deduct tax and NIC from any payments made to the intermediary in respect of the services to the worker.
- The public sector is defined as per the Freedom of Information Act 2000 and The Freedom of Information (Scotland) Acts.
How might this affect me?
Whoever is deemed to be the employer will be required to make payment of tax and NIC to HMRC and report any such payments under Real Time Information (RTI).
If you're a contractor working within the public sector, you'll need to review your contractual and working arrangements to determine whether these are caught by the new rules.
In the majority of cases the public sector will want assurances from the personal service company that their services are outside the scope of IR35 - and may well adopt a default position that all fees paid to personal service companies are within the scope of IR35.
Equally agencies may adopt a default position that fees paid to workers are within the scope of IR35 (even when they are categorised incorrectly by the public sector) to reduce their own exposure to IR35.
The changes to IR35 from 6 April 2017 apply only to the public sector. It remains to be seen whether these rules will be extended to the private sector.
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