The new set of IR35 rules known as ‘off-payroll’ working affect contractors working in the public sector. These rules do not affect contractors working in the private sector though. This guide will explain how the new rules work.
‘New’ IR35 Rules
- The New IR35 or ‘off-payroll’ rules apply to contractors providing services to the public sector through an intermediary/PSC
- Contractors who provide services directly to the public sector are now ‘employees’ and their NICs and PAYE are paid by the public body hiring them
- To determine whether contractors fall within the new ‘off-payroll’ rules will be decided by the public body that hires the contractor directly or through an intermediary/PSC
- This is not determined by the intermediary or the PSC
- The public body or agency known as the ‘fee payer’ is now responsible for paying PAYE and National Insurance contributions (NICs) for the contractor
- The ‘fee payer’ is treated as an employer of the contractor for NICs and tax purposes
Date that new rules will apply
The new rules will apply to payments made by the ‘fee payer’ (public authority or agency) on or after 6 April 2017. Contracts that are operational on or after this date (6 April 2017) will have to abide by these new rules.
How contractors can protect themselves
Contractors that work in the public sector through intermediaries or PSCs should consider their current contracts to prepare for these new rules. New contracts that take the new IR35 rules into account should be drawn up as soon as possible. These new contracts should be applicable from April 6th 2017.
Reasons for ‘New’ IR35 Rules
HMRC wants to ensure that all contractors will pay employment taxes and NICs which was been side-stepped through working for PSCs. The 5% allowance for ‘off-payroll’ administration costs will be removed to simplify administration.
The rules affect certain contractors
The New IR35 ‘off-payroll’ rules affect contractors working for the public sector through a personal service company (PSC). It also affects public bodies, agencies and partnerships who act as an intermediary for contractors.
The rules that do not affect Agencies
The new ‘off-payroll’ rules do not apply if:
- An agency hires a contractor out for work as if they were their employee and pays their PAYE and NICs
- Hires them as a self-employed contractor
The IR35 Digital Tool to determine a Contractor’s Employment Status
This new digital tool should be available before the 6th April 2017.
- It will aid the ‘fee payer’ to decide if the new IR35 rules apply to the contractor they hire
- An employment status test will determine if a contractor is an employee of the ‘fee payer’
- If the ‘fee payer’ pays a PSC/intermediary, then they must provide an employment status test
- The test will determine if the contractor, hired by the intermediary, could be an employee if no intermediary/PSC existed
- If the test shows that they would be classified as an employee, then the new IR35 rules apply
Risk of HMRC IR35 Investigation under New Rules
Those at risk of investigation are contractors who work for a PSC and whose contracts will still be in effect on or after April 6th 2017. The reason for this is that a public sector body must apply the new ‘off-payroll’ rules for payments made on or after April 6th 2017 even if the contract was entered into before this date. HMRC may very well open an IR35 investigation if public sector bodies apply the new rules to those who were once outside IR35 rules.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.