When you work as a contractor through your own personal company, you will be aware of the IR35 rules, which have been around since April 2000. If you contract for a public sector body (PSB) you should be aware that the application of the IR35 rules has changed significantly since 6 April 2017.
For contracts in the public sector the decision as to whether the individual worker is within IR35 now lies with the end client – the PSB. This organisation is supposed to use an online employment status tool provided by HMRC to help it reach a conclusion on the worker’s IR35 status, but most don’t.
If the PSB decides that IR35 does apply, the fee-payer, who is normally the employment agency who arranged the contract, must deduct tax and NI from the amount invoiced by your company. No allowance is made for the 5% expenses normally permitted, or for any pension contributions your company may pay on your behalf.
If the PSB decides that you are outside IR35, the fee-payer can pay your company without deducting tax or NIC. However, the agency continues to be liable for PAYE and NIC due, should HMRC decide that the IR35 decision made by the PSB was incorrect.
To avoid difficulties, some public bodies are taking contractors on to their payrolls, which is what the Government wants them to do. However, most public bodies can’t afford to pay the pension contributions and benefits that workers are entitled to, so will continue to engage contractors.
Before you agree to a new contract, check whether the end client is part of the public sector. This includes any organisation which is covered by the Freedom of Information Act, such as police, schools, NHS, local authorities and the BBC. Top-secret spying agencies: (GCHQ and MI5) are not covered. You may need to revise your fees to cover the tax deductions.