Written by
Gerry McLaughlin, Contractor Expert
, 8 February 2018

Public sector IR35 changes

There were leaks in the FT and Times, before the last Budget, that the Conservatives were going to roll out the IR35 Public Sector changes to the private sector too in April 2018. However, contractors raised a petition of over 10,000 names which meant that the Government had to be informed of it which happened just prior to the Budget.

Almost certainly, as a result of this, the Government didn’t include it in November’s budget. They said that they would have a period of consultation first. This would also include looking at the recommendations of the Matthew Taylor Report.

Dependent and independent contractors

This recommends that there should be two distinct types of contractor in the future. There would be Dependent Contractors and Independent Contractors. The latter would continue to be allowed to operate through Personal Service Companies (Limited Companies for one person). The former would have to pay tax as if they are a permanent employee.

The IR35 changes implemented in the public sector meant that freelancers would no longer be able to decide their own IR35 status as they currently do. This would be decided for them by the Government department that they are contracted to. Tax and National Insurance would be deducted from their income by their agency before they get paid.

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New online IR35 test

To help Government departments decide contractors’ IR35 status, HMRC produced a new online IR35 Employment Status Test. This, not surprisingly, showed most contractors to be inside IR35. 

HMRC said they expect their test to show 90% of freelancers inside IR35. One agency, who have lots of contractors in the NHS said that 60% of their limited company contractors failed the IR35 test.

There was a feeding frenzy early in 2017 of public sector contractors dumping their limited companies and joining umbrella companies.

The Government said that if a Government department got their assessment wrong they would have to stump up the lost tax. The departments were then advised by the major consultancies to take no chance and refuse to take any more limited company freelancers, locums, agency nurses etc.

So, many departments decided to follow this advice and only take umbrella company or IR35 paying contractors in the future. This made a huge difference to the take home pay of public sector freelancers. It also caused the NHS and other Government departments to have trouble both keeping their freelancer and recruiting new freelancers.

The rates that they had to pay to locum doctors soared way above the rate of inflation.

IR35 changes in public sector

At the recent IR35 Forum meeting to discuss the changes recommended by the Matthew Taylor Report, HMRC said that they couldn’t wait for the recommendations of the IR35 Forum to come out before they implemented those IR35 changes in the private sector. They wanted those changes ASAP.

According to HMRC “the Government needs to deal with an immediate and growing Exchequer risk.”

Self employed not paying fair share of tax

It all stems back from Theresa May’s and Chancellor Hammond’s statement that it was unfair that a self employed freelancer earning £100,000 a year pays less tax and National Insurance than a permanent employee earning £100,000 a year. They see this as outrageously unfair and so mean to fix it.

This is despite the fact that it is not comparing like with like. It doesn’t take into account the lack of benefits accruing to a freelancer and the risk factor – as well as the cost of running his or her business. For instance, an employee doesn’t need to hire an Accountant.

However, HMRC and the Government want this implemented as soon as possible.

So, that means the IR35 changes to the private sector are likely to be in the November Budget before being implemented in April 2019. That will devastate the freelance industry. It will hit most contractors hard in the pocket.

Written by
Gerry Contractor Expert
, 8 February 2018

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