20. 09. 2017
Are you working in a Public Sector role ‘deemed as being inside IR35’ but don't really understand it?
I am writing this article (or rant) for 2 reasons –
1 – to give some basic guidance and understanding to anyone that has not yet got to grips with the legislative changes, and
2 – to vent some personal frustration – it still astounds me that this legislation was pushed through in any form, never mind with the muddled contractor/employee relationship that it has been. It does not help the public sector, the contractor community, the flexibility of the UK workforce, or the agency community caught in the middle, trying to calm the parties on either side.
I was hoping that by September, we may have seen some settling down of the impact of the new Off Payroll in the Public Sector legislation, primarily in the understanding across the contracting sector of the changes, and how they affect the way ltd company contractors (and Umbrella workers for that matter) are paid.
Unfortunately, and perhaps, understandably, this is not the case.
I believe this is due to the fact that most contractors just can’t quite get their head around the legislation, the lack of employment rights afforded to those who are now paid as employees and therefore taxed as employees, the fact that rates for those working through their own PSC (personal services company – their Ltd company) will be (or certainly should be if the rules are applied properly) less than those working through an umbrella.
It is this last point that troubles the contractors most, but it is all simply a matter of timing. For anyone deemed to be caught by the legislation, they will be classed as an employee and, as with any company paying an employee, there are HMRC payments and deductions to be made.
(It’s worth pointing out here that if a contractor had previously deemed themselves within IR35 (IR35 rules have not changed, but who decides when they apply has), they would have to pay themselves from their Ltd company as an employee on the whole gross amount earned – their PSC would pay Employer’s NI (and submit to HMRC), then deduct Employee’s NI and PAYE form the pay, to come to a net pay amount.)
Under the new legislation, it is the agency that has to submit the Employer’s NI directly to HMRC before any payment is made to the PSC/contractor, then deduct Employee’s NI and PAYE before submitting payment to the PSC/contractor (VAT on the original gross amount, before deductions, is also paid if VAT registered).
If the contractor works through an umbrella, the same deductions are made but the quoted contractual pay rate includes the Employer’s NI as this is deducted by the umbrella after they are paid by the agency.
Good chance I’ve lost you at this stage, probably because you’re busy huffing and puffing at the idiocy of what you’ve read so far!
Essentially, the difference between the rate to an umbrella and the rate to PSC is the Employer’s NI, which will still be paid over to HMRC by the umbrella.
An employer (the agency is the 'deemed' employer) cannot take Employer’s NI from an employee’s pay so the quoted pay rate has to be lower than the Umbrella to account for this, rather than it being the same and the agency then simply making all 3 deductions (ERNI, Employee’s NI, PAYE) which would be much easier to follow.
The simple table below shows the timings of deductions – the figures are a representation and are not accurate.
PSC (YOUR LTD COMPANY)
Quoted Umbrella Pay Rate £300
Employer’s NI submitted to HMRC £40
Less Employer’s NI deducted (£40) £260
Quoted PSC pay rate £260
Less PAYE and Employee’s NI
Less PAYE and Employee’s NI
Net take home pay
Net take home pay (plus VAT on full PSC pay rate if VAT applicable
At this stage, you probably simply want to know if you are better off working through your PSC or an umbrella.
It could be marginal either way. And not something answered easily. You would need to consider accounting costs, umbrella costs, tax codes, hassle costs, what else you do with your ltd company (ie pension payments etc) etc etc etc. If the only thing you use your PSC for is to pay yourself, then an umbrella may be a simpler option.
And finally, there is still misunderstanding from public sector bodies and contractors as to who has to make the decision regarding whether or not the legislation applies, and how, and when this decision should be made.
One of my colleagues recently received an angered email from a contractor containing the following, which conveniently throws up a number of points:
“Please also read up on how the new IR35 rules work – you cannot make any decision on a contract being outside of IR35 without the contractor taking the questionnaire.”
Firstly, we do not make the decision, the client does.
Secondly, the client can make the decision without using the HMRC toolkit. The toolkit is an aid to making the decision and apparently HMRC will stand by the decision given by the toolkit, providing the information entered is ‘accurate’ (now there’s a good wriggle out for HMRC). It is worth noting that the end client should take ‘reasonable care’ in making the decision, so using the toolkit would certainly support this approach.
Finally, the decision has nothing to do with the contractor using the toolkit. This may give the contractor a case for a discussion with the client (or supporting a case against incorrect tax with HMRC in the future??) but the output is certainly not final.