It has long been a tax-efficient way of working that individual contractors supply their services through a limited company or partnership owned by them, drawing their earnings in a mixture of pay and dividends. But new proposals put forward by HMRC will, if implemented, threaten this arrangement, at least if your company is supplying services to the public sector.

IR35 (otherwise known as ‘intermediaries legislation’) has been in force for years and it is designed to catch those who HMRC believes are not truly ‘self employed’ but are effectively employees of their client. One way to counter this allegation is to demonstrate that you have several significant clients, and not just one. If you fail to make your case, the impact is severe: you will be taxed as if you were subject to PAYE but you will not have the employment protections that go with it. ‘IR35-friendly’ contracts can be drawn up, and as an accountant for self-employed people we at Odiri Tax Consultants can advise on this.

Now, HMRC aims to cast its net wider and wishes to make anyone who has a ‘personal service’ company and who works with public bodies to be assessed for IR35. This would apply regardless of who pays them (either an agency or the ultimate client).

HMRC is aiming to introduce this new ruling before April 2017. It will be accompanied by a ‘digital tool’ that will apparently assess your contractual arrangements, to decide whether or not you are caught by IR35. Employment agencies and public organisations will be expected to use this tool to work out which way to treat you, before they draw up any contract.

Contractor Implications

If you are brought into the IR35 net by these changes then the impact on your income is likely to be significant. You will be able to deduct certain expenses but on the balance (the so-called ‘deemed payment’) you will have to pay Schedule E taxes and National Insurance (N.I.). Of course you should be making some N.I. payments until you reach the maximum State pension entitlement, but under this proposal you will have no option as to their amount and the duration.

If you are no longer able to draw income as dividends but it all becomes subject to PAYE, your effective tax rate will be higher.

Agency Implications

Starting in April 2017, the position of the recruitment agencies will be thrown into higher relief. They are expected to carry out (before a contract is issued) thorough assessments of temporary contractors who are on their books, or of newly advertised contracts, and come to a conclusion as to whether each contract puts the contractors in or out of the IR35 legislation. Hitherto, the onus has been on the contractors’ limited companies or limited partnerships to determine this issue.

Will there be a Brain Drain?

It is a real possibility that this change, if enacted, will drive self-employed people away from seeking jobs in the public sector. And that is a major issue for the economy. We are not just discussing highly-paid TV presenters or management consultants here, but people without whom essential public services cannot function, for example –

• Doctors, nurses and other medical specialists
• Teachers
• IT developers and support staff on critical systems

We have already seen countries like Australia and Canada advertising for experts in these and other fields, offering better terms and an attractive working environment. Brexit is also likely to be in many contractors’ minds and may influence people to seek contracts abroad.

Consider also the potential gap that might open up between public and private sector contracts – whereby private hospitals and schools, and businesses of all kinds that need digital expertise, will be able to offer contractor-friendly terms at the expense of the NHS, State schools and Councils.

To keep abreast of the latest IR35 developments and other issues that are likely to affect you, consult a specialist Accountant for Contractors – Odiri Tax Consultants.