Changes to the tax rules for personal service companies in the public sector have led to anger and some confusion.
Since 6 April 2017, it has been the duty of public sector organisations to determine the IR35 status of people they engage through an intermediary. Previously it was up to the contractor to do so. Where a public service organisation considers the IR35 rules apply to a personal service company or other intermediary, they must deduct income tax and national insurance contributions from fees paid to the intermediary as if it were an employee.
Contractors have complained that some public sector organisations are adopting an overly cautious approach. The changes affect anyone working for a public authority, including government departments, local authorities, hospitals, schools and universities, the BBC and Channel 4, and police and fire authorities. If the engagement is through an agency, the agency must deduct employment taxes, but the public sector organisation has to inform the agency whether the employment status test is met.
An engagement falls within IR35 if its terms are such that the contractor would have been an employee of the client but for the existence of the intermediary. Whether that is the case depends on several factors, such as the nature of the worker’s role and responsibilities, who decides what work needs doing and when, where and how it is carried out and the basis on which the worker is paid.
The Employment Status Service tool
To help public authorities decide, HM Revenue & Customs (HMRC) introduced a new Employment Status Service (ESS) tool in March, which anyone can use to test the status of a contract. If a contractor thinks a public authority is wrongly deducting tax, they could use the ESS and show the results to their client organisation. HMRC says it will stand by the result given by the ESS, unless a compliance check finds that the information provided was not accurate.
Another change that applies from 6 April 2017 is that the 5% deduction allowed to intermediaries for ‘notional expenses’ will no longer be available in the public sector. This follows the restriction to tax relief for the cost of travel to temporary engagements when working through a personal service company. This change was introduced in 2016/17 and has affected people such as locum doctors, who take on engagements all over the country.
Please contact us for advice on how these changes may affect you.