One of the things that the Chancellor, Philip Hammond, slipped into last week’s Autumn Statement was a new ruling regarding the IR35 status of contracts within the public sector. This has huge implications for contractors operating through a Personal Service Company (PSC), not just in terms of their tax liabilities and other expenses but with their very existence as contractors. Those working in the public sector might just decide it’s finally time to quit and get a job.
My own opinion is that this change in the way that IR35 is applied within the public sector (due to start in April 2017) is just an acid test and could be rolled out across the board if it is deemed by HMRC to be successful. Which brings me to my other point – I believe that the whole idea is fundamentally flawed and will cause no end of problems.
What does it actually mean to you?
The bottom line is this: currently if you are operating through a PSC, it’s your responsibility to assess and form an opinion on the IR35 status of your contracts. From April of next year, if you have active contracts within the public sector, the organisation that pays your PSC will make the judgement – not you.
Financially, it is far more beneficial for PSC contracts to fall outside of IR35. That is why most PSCs use a specialist contractor accountant to review their contracts (preferably one like us who will guarantee their opinion).
The reason that these new rules are going to cause such an issue is that forming the opinion will soon rest on the shoulders of someone who could be underqualified and unmotivated to take on the responsibility of such a decision. The pressure of being held to account could influence the public sector to err on the side of caution and deem more contracts to fall within IR35 and therefore PSC contractors effectively being taxed as employees.
As a PSC contractor, if you choose to enter into a contract, even if it is deemed to fall within IR35, the change in how your income is taxed is not the only loss you will face. You will no longer be able to claim the 5% allowance for expenses – this could have a significant impact on the way you fund the day to day costs of operating your PSC.
The knock-on effect could be immense…
This move might result in more tax revenue for the government but it will also create more cost, hassle, inconvenience, lack of supply, breakdown of trust and confusion for everyone else. Perhaps the worst side effect will be that PSC contractors start to favour employment over the flexibility of freelancing and the public sector will ultimately find that it can’t access the expert resources it occasionally needs as readily as before.
To help make these new rules easier for everyone who could be affected, we have put together a presentation containing the clearest and most comprehensive explanation of IR35 that is available today.
Those that have watched it so far have said:
“At last, I understand IR35 – thank you, Louise.”
“I thought I understood IR35 before – but now I realise I need to get my contracts reviewed”
“Excellent presentation – the best one yet.”
“Louise is a very natural presenter and really brought the examples to life.”