IR35 and the Public Sector

Background 

Many people use their own limited companies or partnerships also known as personal service companies (PSCs) to provide their services to clients. Intermediary’s legislation also known as IR35 tells you how you should treat payments received from contracts, and how the profits of that business should be extracted and taxed.  

What is changing? 

It has been announced that as of 1 April 2017, intermediary’s legislation is changing for those engaged by public sector clients. For example; government departments, armed forces, local government, NHS, schools and further higher education institutions, police and fire departments, other public bodies such as the BBC, The Bank of England and all publically owned companies. 

It will no longer be your own responsibility to determine if IR35 applies to an engagement, it will now be the responsibility of the client. HMRC have created an online tool which will help to determine a contract status, this will be used irrespective of the contract length. 

This does not apply for those engaged outside of the public sector. 

If you are in a current contract, the client may declare that IR35 does apply which could change the way you are taxed. 

What does this mean?

If the client determines that IR35 does apply to an engagement: 

  • You will be taxed at source through Real Time Information (RTI)
  • Your employee status will NOT change 
  • You will NOT receive any employee benefits such as holidays, sick pay or employment rights.

 Example - New calculation

 

Gross Contract Value for Year £36,000
Net Contract Value for Year £30,000
Personal Allowance (£11,500)
Taxable Income after Allowance £18,500
   
Tax at 20% £3,700
Employee National Insurance £2,620
   
Company receipt £29,680
Employer National Insurance – paid by client £3,013
Flat Rate VAT at 16.5% to be paid to HMRC £5,940
Net disposable cash £23,740

 

Withdrawing funds from the PSC won’t change, however the proportion taken in salary and dividends may vary to previous years. Taxes that have been deducted and paid over to HMRC will be off-set against any withdrawals from the PSC to ensure tax and national insurance is not paid twice. 

Who will this affect? 

It will increase the tax paid by contractors who are engaged in the public sector and operate through their own personal service company.  

If you are a contractor working in the public sector and require more information or would like us to calculate how this effects your company. Please contact us on 0845 330 3200