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Introducing our newest feature for our blog, Tax Talk, featuring fortnightly articles by our experts on topical tax issues. 

IR35 – A New Era

Since 6th April 2017 new IR35 rules have been in place that have fundamentally changed the way personal service companies (PSCs) are taxed when dealing with the public sector. 

Before the change, PSCs determined if IR35 applied to their arrangements. HMRC felt, however, that too many PSCs were not reporting under IR35 when they should have been but lacked the resources to go after every case.

Since 6 April 2017  the onus is now on the public sector body of the PSC to decide whether IR35 applies.

If the client decides that IR35 applies then they are required to process the PSC through the payroll system, deducting tax and NIC at source as if they were an employee. Although the PSC will be processed as an employee their employment status won’t change and therefore will not receive any of the rights or benefits they would receive as an employee such as pensions and holiday pay. The clients will also have to pay employer’s NIC on the payments made. This treatment will give a significant cash impact to those business dealing with the public sector.

Due to the complexity of the IR35 framework and the threat of fines for non-compliance we are seeing that most public sector bodies are applying a blanket approach to their arrangements with PSCs. Under this approach all contracts are being treated as if IR35 applies, regardless of whether or not this should be the case. 

PSCs now have the burden of proving to the public sector organisation they work for that IR35 does not apply and convincing them to change their approach. To give PSCs some clarity HMRC have now provided a new  online employment status tool, called ESS https://www.gov.uk/guidance/check-employment-status-for-tax. Unlike previous versions the results of this can be printed off and will be binding on HMRC.

While it is possible to reclaim any tax deducted in error, we expect this to be a long process giving a significant cash flow disadvantage and increased HMRC scrutiny of the PSCs affairs once a claim is made. 

Given the above we recommend PSCs use the ESS tool to provide their clients with the outcome as evidence IR35 does not apply to them and also should HMRC enquire at a later date.

While the full impact of the changes will not be seen for some months, if the new changes raise the revenue HMRC is hoping for the fear is that will seek to apply the same rules to all businesses. 

 

For any advice on tax related issues, please don't hesitiate to contact me