Contractors working in the public sector can no longer determine their own IR35 status as of the 6th of April 2017. If you work in the public sector, your public sector client is responsible for determining your IR35 status and should take reasonable care in making the assessment.
HMRC passed the legislation for off-payroll workers in the public sector to stop the tax avoidance of workers engaged through their own limited company, who would otherwise be working as an employee if not for the personal service company (PSC) arrangement.
If your client deems your assignment as being inside IR35, they must inform your recruitment agency or other third-party body. Your agency or fee-payer will then make the necessary tax and National Insurance deductions before making payment to your limited company. If you contract directly through the public sector body, the public sector body will then make the deductions.
How will my client/agency determine my IR35 status?
Your public sector client should take reasonable care when deciding whether IR35 applies to your assignment. There are a few ways they can determine your tax status:
- Internal processes: your client may use their own internal processes to assess your tax status. However, this is how specific organisations have come to blanket-assess all their PSC contractors as ‘inside IR35’.
- HMRC’s CEST tool: HMRC has created a ‘Check Employment Status for Tax’ tool, or CEST tool, that goes through a series of questions based on the contract and will provide you with the following determinations: employed for tax purposes for this work, self-employed for tax purposes for this work, off-payroll working (IR35) rules apply, off-payroll working (IR35) rules do not apply.
- Tax specialist: Your client may use a tax status specialist to assess your tax status based on your contract terms and working practices.
What happens if my contract is inside IR35?
If your assignment is inside IR35, you have some options:
- Continue working through your limited company – you could continue to contract in the public sector through your limited company and accept the lower take-home pay you will receive. You will no longer be able to claim certain expenses and must pay income tax and Employees National Insurance Contributions (NICs). You will need to speak with your agency/end-client if you wish to still be paid through your limited company even though your assignment is inside IR35.
- Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any corporation or dividend tax on top of paying income tax and employees NICs. You will receive employee benefits unavailable to you when contracting through a limited company. Find out more about switching to umbrella. It’s common for agencies and end-hirers to offer two rates for temporary assignments – an agency PAYE rate (if this payroll option is available), or an umbrella rate. The umbrella rate will be slightly inflated to take the employment costs into consideration. If you are not sure what your rate would be through an umbrella, or you would like to negotiate a higher rate to consider the loss of earnings (compared to being outside IR35) contact your agency or end-hirer for more information.
- Look for an assignment outside IR35 – There are still plenty of assignments that fall outside IR35. Therefore it’s worth keeping an eye out if you’re keen to operate through your limited company in the future. However, for assignments inside IR35, using an umbrella is a popular choice amongst temporary workers in the UK.
Please note that this is not an exhaustive list of options, and you should consider speaking to an expert before making a big decision.
What are the benefits of using an umbrella company for payroll when inside IR35?
Working via an umbrella company is one of the easiest ways to work if your contract is inside IR35. You can be onboarded and ready for payment in under 15 minutes and use the umbrella company as and when you need for contracts inside IR35.
When you register with an umbrella company, you will become an employee of the umbrella company and have the same employment rights as any other employee in the UK. These benefits include auto-enrolment into a pension, where you meet the qualifying criteria and statutory employee benefits such as sick pay and maternity/paternity pay.
Your pay will be operated through PAYE, and the umbrella company will make all the required income tax and employee NIC deductions and pay this to HMRC on your behalf. It is also worth noting that all compliant umbrella companies must make the same tax deductions set by HMRC. This means there should be very little difference in the take-home pay rates you are offered between providers.
The only thing that will alter your take-home pay is the umbrella company’s margin. If you are offered significantly higher take-home pay from an umbrella company, beware – you may be engaging with a tax avoidance scheme. This could result in HMRC issuing you a penalty at a later date.
Fusion Business Services has a range of accountancy services
If you’re looking for a compliant and reliable services provider you can trust – you’ve come to the right place. Founded by experts with over 20 years of experience in the contractor payroll sector, Fusion Business Services was created to support contractors in the UK with their limited company accountancy and self-assessment tax returns. We also offer a variety of services to help small and medium-sized businesses, including outsourced payroll and landlord accountancy. Please call our expert Sales Consultants on 0800 2294020 to find out more about our services.
