The biggest shake up of the IR35 rules will be with us from 6 April 2017. The new legislation is being introduced will need to be considered if your client’s are working via their own limited company and the ultimate end user of their services is a public sector body, this will include for example; the NHS, central or local government department and Transport for London.
The New Rules
HMRC are creating an online test for public bodies to use which will determine whether or not the rules apply. The initial consultation on these changes suggested that HMRC were going to focus on four criteria to determine whether the legislation applies, namely:
1. If the services were through a limited company and the worker is also the owner of the company
2. If less than 20% of the fees paid to the company are for materials
3. Whether the ability to provide a substitute exists
4. Whether there is a sufficient degree of control by the public body on how the services are provided
Francis Clark Tax Consultancy have been involved in the testing of the Employment Status Service (ESS) online tool HMRC have been developing to help the public sector organisations considered the legislation. Our testing of the ESS tool has shown the online tool doesn’t focus solely on the above criteria as the original consultation suggests, but also considers other traditional IR35 factors such as financial risk and how integrated the worker is within the public sector organisation.
If your clients are caught by the new legislation, any fees paid to them will be deemed to fall within the new IR35 provisions and the public body will be required to deduct PAYE and national insurance on payments made to the company. If the services of the company are provided via an intermediary agency, the agency will have the responsibility to deduct PAYE and national insurance. The obligation to determine whether the legislation applies will still be the responsibility of the public sector body.
As well as being subject to PAYE and national insurance, payments to the company will also be reported on the RTI returns of the public body/agency. In addition, the 5% deduction for IR35 caught companies will no longer be available to public sector engagements.
The test is likely to be completed HR representatives of the public body rather than tax professionals and when answering the questions asked by the test the representatives are unlikely to appreciate the implications of the answers they give resulting in companies wrongly being deemed to fall within the rules. For instance, insisting that a contractor complies with the public body’s health and safety rules could be seen by a representative without tax knowledge as control over the contractor, however for tax purposes health and safety compliance does not constitute control as all workers employed or otherwise need to comply with safety at work legislation.
Some public sector bodies such as Transport for London have already said they will adopt a blanket approach to consider all limited company contractors to be within the legislation, presumably to mitigate their risks and potential tax exposure on them for incorrectly answering the questions. This type of approach is clearly going to create a position where clients are mistakenly caught by the legislation.
In addition to the financial implications of the public body wrongly deeming the legislation to apply, HMRC will also have increased information about the company from the RTI returns reporting payments to the company and are likely to use this information as a targeting tool to enquire into the historic IR35 position of your clients – their conclusion being, if you’re caught now, you must have been caught previously.
What Can Be Done
As a starting point, the contract your client has for their engagement with the public body should be reviewed. Provided the terms of the contract reflect the how the work is undertaken, we can provide an opinion on whether the rules will apply. This opinion can then be provided to the public body in support of the rules not applying.
If our opinion isn’t sufficient to stop the public body deeming the client to fall within the rules, as HMRC have provided us with early access to the ESS tool as one of its beta testers we can use the ESS tool along with our specialist knowledge to answer the ESS questions correctly to provide an accurate answer that reflects the true position of the contract for tax purposes. HMRC have said that they will not look to challenge results of the test provided they’re completed accurately and this should therefore be sufficient to stop the public body deeming your client to fall within the rules.
If all else fails and the public body still insist on deeming your client to be caught by the rules, we are able to appeal their decision to HMRC and look to recover the tax and national insurance back.
The first time your clients are likely to hear about the rules effecting them is via a request from the public body for more information from them to report payments to the company under RTI.
In advance of this, we would strongly urge you to review and consider the contracts your clients have in place with public bodies.
We are currently able to offer a fixed price of £250 plus VAT to review your client’s contract and run an ESS test on our review findings to arrive at a conclusion and supporting ESS result that will help give clients clarity on the application of the rules to them and evidence to provide to their public sector engager.
Should you wish to discuss these rules further please contact Scott Campbell or Mark Davies on 01803 320100.