IR35 - is this the end of an era?8 December 2016
In the Chancellor's Autumn Statement he announced a somewhat innocuous change in legislation, albeit with far reaching consequences for the public sector and its use of contractor staff via Personal Service Companies (PSCs).
This latest change reinforces HMRC's appetite to close this longstanding tax loop. The legislation known as IR35, was introduced by Gordon Brown in his Pre-Budget speech in 1999 and was formally implemented as part of the Finance Act in April 2000.
Over the years, accountants and lawyers have worked tirelessly and ingeniously to create special purpose vehicles in the form of intermediaries and umbrella companies, on behalf of their clients, enabling them to avoid the implications of IR35. However, the HMRC have been reluctant to recognise such contractors as ‘self-employed’ from a taxation perspective and have maintained their position that these individuals should be taxed the same way that a general employee is, thus falling under the sphere of IR35.
However, the latest development in legislation, due to come into effect in April 2017, has shifted the onus on to the public sector (or the agency if supplied through that route) to apply PAYE and National Insurance Contributions ahead of payments to the individual or PSC.
In this context the public sector includes both central and local government authorities and agencies, as well as the BBC, Channel 4, MOD, NHS, Fire Service, Police, Schools and other higher education authorities.
To illustrate the implications of this latest development it is estimated that 9,700 IT contractors in the public sector, which is circa 50% of the IT workforce, will be affected by this new legislation. There will be many more thousand contractors affected within the public sector, including organisations such as Network Rail, HS2, TfL, to name but a few. It should be noted that a similar approach will be applied to the private sector at some point in the future.
This latest development is not easily resolved and presents huge challenges to the public sector and how they will maintain day to day business operations and/or continue delivering multi million, if not billion, capital investment programmes.
To maintain the status quo and retain the contractors at their current day rates clients will need to offer either employment or fixed term contracts, both of which will attract increased costs relating to national insurance, healthcare and pension contributions, as well as holiday and sick leave provisions. In parallel, the contractors will be impacted by a material reduction in take home pay as a result of PAYE tax payments being subtracted at source by the employer. Both of which are not palatable solutions for either party in the current economic climate. Alternatively, clients will need to backfill contractors with new employees or tender service based commissions via consultancy organisations.
How this issue will play out remains to be seen, but the impact will materialise early in the New Year.
The Partners of CPC are currently devising plans on how best we can support our clients through this changing and difficult period.