IR35 and Tax/NIC Status Advice You and Your Clients can Afford!

IR35 and the Public Sector

Advice for those providing services to the Public Sector

Background

Following some high profile cases of individuals working for the public sector, via their own personal service companies, the Government announced a review of the tax arrangements of public sector appointees. As an employer, the Government announced that individuals who are board members and those with significant financial responsibility should be put on the payroll. Other individuals, engaged off payroll where the cost to a department is in excess of £220 per day, under contracts lasting more than 6 months, need to provide assurances that they are paying the correct amount of tax. If a public sector organisation fails to gather such assurances then severe financial sanctions may apply with fines of up to 5 times the annual costs of each off payroll individual. For full details see http://www.cabinetoffice.gov.uk/sites/default/files/resources/PPN-0712-Tax-Arrangements-of-Public-Appointees.pdf

Scope

This affects most contractors where public sector money is at the end of the line including cases where agencies and consultancies are in the chain and extends to other bodies such as the BBC and the NHS.

What does it mean for me?

Generally it means that contracts will be changed to include clauses giving the right for engagers to seek assurances and information and evidence to show that income is being treated correctly for tax and NIC purposes and especially with regard to IR35. Those operating through Umbrella companies or on agency payrolls will have to provide copies of their payslips. You could risk having your contract terminated if you do not comply with the assurance process and failure to comply could result in the engager informing HMRC.

What do Contractors with a personal service companies have to do?

Step 3 of the guidance is the critical part and states:

Where the worker is engaged through their own limited company (a personal service company) and not withdrawing all their income from the department under PAYE (as set out in step two) they will need to provide evidence of one of the following:

a) The worker should be able to show that their service company is low risk for IR35 according to HMRC?s “business entity” tests described in HMRC guidance published May 2012 http://www.hmrc.gov.uk/ir35/guidance.pdf . This means that they are a low risk of HMRC checking whether they need to operate the IR35 legislation described in step three. The worker will be able to provide this at the 6 month point. Provided the terms of the engagement remain the same, the service company will remain low risk for the duration of the contract.

b) If the worker is medium or high risk according to HMRC?s “business entity” tests but feels that they are outside the scope of IR35, then they will need to provide assurance in a different way – for example, following a contract review by HMRC?s independent IR35 helpline. The worker will be able to provide evidence of a contract review to say that they are outside the scope of the IR35 legislation at the 6 month point. If the terms of the contract remain the same, the assessment of the service company will not change for the duration of the contract.

c) If the contract is within the scope of IR35, the worker can provide evidence that they are operating the IR35 legislation on the payments received from the Department. This can be evidenced by the worker providing a “deemed calculation”. This is a calculation that requires the worker to consider all the income for the year from a particular contract that is within IR35, make a „deemed payment? to HMRC for employer NICs and pay employee NICs and PAYE on the remainder of the income. The deemed payment calculation can be accessed online at http://www.hmrc.gov.uk/ir35/ir35.xlt. The legislation only requires the individual to make this payment at the end of the tax year, so it will not be possible to provide assurance until this point – the individual will need to indicate that they are intending to do this when assurance is sought and commit to meeting this requirement at an agreed later date.

If the department is not satisfied with the evidence they receive they may send details to their CRM or customer coordinator in HMRC to be considered alongside other intelligence to support HMRC?s work to tackle non-compliance. Taxpayer confidentiality means that HMRC will not be able to share the results of any follow-up action with the department.

Action required:

  1. Take the HMRC business entity tests.
  2. If Low risk – you will be asked for a signed declaration to state that you have taken the tests, the number of points you scored and that you have gathered and retained enough relevant and reliable evidence to support your score as required by HMRC. The engager should do nothing more other than to record the number of low risk cases for statistical purposes and to keep your signed declaration.
  3. If Medium or High risk AND you believe you are outside IR35. You should provide evidence of an IR35 contract review undertaken by either HMRC or another acceptable provider and you will be asked to sign a declaration that you have taken the tests and are medium or high risk, the number of points you scored and that you consider yourself as outside the scope of IR35. The engager should do nothing more other than to record your case for statistical purposes and to keep your signed declaration.
  4. If Medium or High risk AND you believe you are inside IR35. You should sign a declaration that you are medium or high risk and that you consider that this engagement is inside IR35 and you will commit to provide evidence that they have operated IR35 after the end of the tax year. As this is not declared until 19th May you may be asked to provide this by say 31st May. The engager should do nothing more until the agreed date.

All of our clients who have used Bauer & Cottrell IR35 contract review services will be provided with an assurance certificate for presentation to public sector engagers. Bauer & Cottrell will also provide assistance and further guidance for you.

Points to note:

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