Public sector contractors are affected by the ‘new’ IR35 rules which do not however affect contractors working in the private sector. The rules are complicated and unclear and key implications for those contractors affected will be highlighted.
Who do the rules apply to?
The New IR35 ‘off-payroll’ rules apply to:
- Contractors working for the public sector through a personal service company (PSC)
- Public sector organisations and agencies who contract contractors out through PSC’s to the public sector
- Partnerships who act as an intermediary for contractors
How do the ‘New’ IR35 Rules affect contractors in the Public sector?
- The New IR35 or ‘off-payroll’ rules affect contractors who work for a public authority directly or through an intermediary or PSC
- Such Contractors are now seen as employees by the ‘new’ rules
- These employees or ‘contractors’ will have their PAYE and NICs paid for them by the public authority
- The public authority or ‘fee payer’ that hires the contractor directly or through a PSC will decide if the contractor is an employee or not
- The ‘fee payer’ is now the employer of the contractor for NICs and tax purposes
When will the ‘New’ IR35 Rules come into force?
The new rules will come into effect on or after 6 April 2017. It will also apply to payments made by the ‘fee payer’ to the contractor on or after this date.
Is an Agency affected by the new ‘off-payroll’ rules?
- An agency who hires a contractor as an employee and pays their PAYE and NICs
- An agency who contracts a self-employed contractor
- An employment status test must be performed to decide if a contractor is an employee of the ‘fee payer’ using the IR35 digital tool
- When a ‘fee payer’ hires a contractor through an intermediary or PSC then they must assess if the contractor hired by the intermediary could be their employee if no intermediary or PSC existed
- The test will determine how the contractor should be treated. If it is deemed that the contractor should be treated like an employee, then the new IR35 rules must be applied
Why are the ‘new’ IR35 Rules being made?
HMRC wants a better tax system where contractors cannot avoid paying PAYE and NICs when they work for PSCs. Public sector organisations are liable to provide intermediaries and their contractors with information about whether they fall within the ‘off-payroll’ rules. This ensures that contractors will have to pay PAYE and NICs but the public sector organization hiring them will now be responsible for them.
Why an Employment Status Test must be performed?
When will HMRC IR35 Investigate?
HMRC will normally investigate if a public sector organisations applies the new IR35 rules to contractors who were outside the IR35 rules before the 6th April 2017. As a precautionary step all contractors who work with public sector organisations should draw up new contracts that take effect from April 6th 2017.