Information Technology Recruitment

Are you a Limited Company (PSC) worker, still confused about IR35, or Off Payroll in the Public Sector and how this affects the way you’re paid, or the way you pay yourself, or how much you'll 'lose'? Even though we are now over 10 months into the changes made regarding who makes the decision on whether IR35 applies in the public sector, there is still confusion as to how this will actually hit contractors in the pocket. We are still speaking to many contractors who make all sorts of claims about how little they will actually take home compared to when they previously worked outside the IR35 legislation, sometimes as little as 40%. Now whilst I agree that in all but the simplest situation, contractors will be slightly worse off, it is rarely by the amount that is first perceived (unless, of course, there are some funny goings on in terms of not quite paying the amount of tax owed*) Note that I do not intend here to go into specific calculations and where example figures are used, these are purely that, just simple example figures. The first thing many contractors do is to compare the net amount they will be paid inside IR35 with the gross amount they usually get outside. For example, a contractor used to earning £500 per day outside IR35, is likely now to be offered a rate of around £435 per day inside IR35 (the difference being the submissions that agency needs to make to HMRC for Employer’s NI, as well as the apprenticeship levy if it applies). From the £435 per day, employment deductions of Employee’s NI and PAYE will be made, before the ‘deemed’ payment is made to the ltd company. If one simply compares £500 per day to the new payment of £435 less deductions, then clearly there is a significant difference. But it is not that simple as there are other rules / obligations that need to be considered. For those INSIDE IR35: Your company is paid the Deemed Payment (the net payment after deductions made to the contractor’s ltd company): Once the deemed payment is made to the ltd company, you still need a way of taking that money out of your ltd company. This can be done in 2 ways: 1. Dividends: If you’re a director of your own company, you might choose to pay yourself a dividend from the company’s profits. You can pay yourself a tax-free dividend up to the total of the deemed direct payment received from contracts in the public sector, where Income Tax and NICs have been deducted at source. You don’t need to declare that dividend on your Self Assessment tax return. 2. Payroll: You can pay yourself for the work provided to public sector clients through your company’s payroll. As employment taxes have already been paid on the amount your intermediary receives, you can pay yourself that amount without deducting Income Tax or NICs. And the icing on the cake: No Corporation Tax When you are calculating your company’s turnover, you should deduct the VAT exclusive amount of the invoice, which is the amount from which Income Tax and NICs were deducted at source. Your company accounts should show this deduction to make sure the amount is not taxed twice. For those OUTSIDE IR35 To get your £500 per day out of your ltd company, again you can pay yourself dividends, or a salary (or mixture of both) Dividends: The tax advantages between dividends and salary are diminishing but, nevertheless, there is still a slight advantage to dividends. As opposed to the Inside options above, your dividend will be liable to dividend tax, and corporation tax. Payroll: You can take it as salary – but your company will be liable for Employer’s NI (aha, so there’s the difference between the £500 and £435 already gone), then there are the same NI and PAYE deductions taken, meaning that if you were to pay yourself purely by means of a salary, your take home will be the same as if you received the deemed payment from the agency. As you can see, the difference is not as clear as might be first thought, and many roles inside IR35 have the rates inflated to compensate. So next time you are considering turning down a contract opportunity that is caught by the legislation, it might be time to think again! *Many contractors are unaware of the Employment Intermediaries Legislation which requires employment intermediaries (ie agencies) to submit a quarterly report to HMRC detailing ALL payments made to a contractor / contractor’s ltd company - they know what contractors should be declaring regarding all funds paid through an intermediary.

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. UMBRELLA 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. And breathe...

IR35 in the Public Sector – still not understood (by the public sector) Many of you may have read a couple of recent articles I wrote titled ‘The (un)intended consequences of Off Payroll changes in the public sector!’ and ‘The Farce that is IR35’. Something I mentioned in these articles was the lack of clarity provided to the public sector by HMRC, with almost zero time for the entire industry to be ready, and thus blanket decisions being taken on contractor statuses. Many of our NHS trust clients pushed out communications something like this: We have already undertaken some work in this respect. Initial assessments of placements have indicated that they are all deemed to be caught under the new IR35 rules. We, therefore, consider the most prudent approach to take post April 2017 would be to treat all engagements/placements as falling within the scope of the new rules. This will significantly reduce the level of administration and communication between us. What I hadn’t mentioned was that most of these communications were based on direct advice from NHS Improvement, the body responsible for overseeing foundation trusts and NHS trusts, telling the trusts to make these blanket decisions and deem ALL contractors inside the legislation. We then had to spend weeks and weeks working with our clients to unravel this misunderstanding and ensure that they took reasonable and proper care in making the decisions on status. Now after battling through the first couple of months of the wrong status, unfair and incorrect taxation, contract rate changes, contractors leaving roles, trusts losing critical contractors etc etc, NHS improvement has now released new advice, completely contradicting what they originally advised (I am pleased to say that this is a necessary and correct contradiction!). This just compounds the frustration felt regarding the handling and implementation of this entire fiasco, the lack of communication across government departments, HMRC, public sector bodies, and the entire contract community, and also highlights that fact that this legislation was clearly ill-conceived from the start and certainly should never have made it to statute. I just pray for those that benefit from the fact that the UK has a tremendous pot of skills in our flexible workforce, that some sense is seen before someone decides that this has worked and it’s time to push it through to the private sector. That will be an even greater disaster. Some simple guidance can be found here.