IR35 and VAT flat rate, Autumn Statement Webinar – the unanswered questions
Thank you to everyone who tuned in to the webinar on Friday. If you missed it, you can watch the recording here.
We had lots of good engagement – in fact we had so many questions we were unable to deal with them all during the session. Below we have listed out the unanswered questions and wherever possible, given our answers.
What are the changes to IR35 in the public sector?
The underlying IR35 rules are not changing, but the responsibility for determining whether they apply will shift from the contractor to the public sector end client. So, in the public sector only, the hiring organisation will determine the IR35 status of an engagement. If it decides IR35 does apply, the contractor business will be taxed at source, through the RTI system, exactly as if it were an employee. This change will be effective from April 2017.
For now, the changes will only affect those engaged by public sector clients. Public sector clients are defined as set out in the Freedom of Information Act. In other words: if the organisation has to respond to Freedom of Information requests, it is a public sector organisation for IR35 purposes.
How likely is it that the government will look to implement this in the private sector in the future?
Almost every independent tax expert – no, in fact EVERY independent tax expert – we have spoken to believes the Government will look to apply the rules in the private sector in the not too distant future.
How will legitimate business costs like insurance or accounting be taken into account? i.e. can we claim back the difference between tax on rates and actual post-cost income?
There is no provision made for expenses in the legislation. The 5% allowance which is made for business expenses in the normal IR35 rules has been removed for these public sector arrangements. Needless to say, IPSE believes this is extremely unfair.
What is the position regarding income tax and employers/employees NICs for employer pension contributions made by the contractor's company.
Tax relief on pension contributions made by the contractor company (PSC) will still be available, but there are question marks over this will work in practice. We are seeking further advice on this. In the meantime, IPSE members can ring the tax helpline 01788 558 871 for further advice.
I have heard various percentages being banded about, and I know it depends on specific circumstances, but how much worse off are individuals likely to be. I understand it is between 10 - 20% of net income?
This is very difficult to say. It depends on your circumstances and the structure of your company. If you are currently claiming tax relief on travel and subsistence expenses that will be stopped so depending on the value of that relief, the impact could be significant. In addition, the direct tax impact will be greater if you currently take the maximum in dividends and if you have a spouse as a company director.
Can you confirm that clients will also be paying employer's NI?
Yes. The client or agency will pay Employers NI, should it be determined that IR35 applies to the public sector engagement. If your company is paid by the client, the client will pay it; if an agency pays you, they will pay it.
What happens if you already have a contract in place when the changes are applied?
This will be particularly difficult. There will be cases where the engagement has been going for a few months and the contractor has been satisfied IR35 doesn’t apply. After April the client might then decide it does apply. Our survey results suggest many contractors will not accept this and walk out.
Does IPSE have a view of how many government programmes/initiatives will potentially be affected if people leave public sector?
We do not know for sure but we think the impact could be very significant.
Has the OBR's analysis drilled down in to industry sectors?
The OBR briefly mentions it as follows:
“Operating as a company is an increasingly common way to structure a business in a number of sectors – particularly construction, retail, IT, media and professional services. These sectors account for more than half the modelled company population in 2014.”
The legal position:
How do you see the legal advice panning out? What progress so far and are you working to any timeline?
We are seeking advice on a range of issues thrown up by this ill-conceived measure. This includes how a contractor might challenge the status decision made by the client and whether there is an impact on employment status (and rights). It seems likely we will have to wait until the new regime in the public sector is up and running before we will know how this will pan out.
Are these off-payroll regulations/ decisions something that can form the subject of a judicial review? Especially the concept of paying employment taxes and not getting employment rights?
We are looking into this but the early signs are a judicial review would not be an appropriate mechanism.
What would be the legal position on treating with fairness, "the case of paying employment taxes will be denied employment rights, like, redundancy pay, holiday pay, etc."?
We agree. Instinctively it seems unfair. Deducting employment taxes but not awarding employment rights seems wrong. We believe if the Government wants the people that work for it to pay employment taxes it should employ them.
However, the legal position on this is unclear. This is because tax status is considered quite separately from employment status. Nonetheless we are exploring legal options around this.
What happens with AWR?
This is an interesting question which aligns with the employment rights issue. If the contractor is being taxed like an employee, will they:
1) Be more likely to claim parity of rights with employees under the Agency Workers Regulations?; and
2) Be more likely to be awarded those rights?
We are seeking advice on this but, again, it looks likely we need a test case to know for sure.
How would this apply to sub-contractors to companies who provide services to the public sector?
This is not 100% clear and we are seeking clarification from HMRC. However, it seems that it will be depend on the precise structure of the arrangements. We have attempted to answer this in relation to a couple of examples below.
I run an IT agency providing contractors to a large IT company. Some of the consultants work on site at government sites on behalf of the IT company - is that enough abstraction for me as an agency to declare all my contractors outside IR35?
It sounds as if those engagements will be within scope of the new rules. If you are the intermediary that pays the contractors’ PSCs, and those PSCs are supplying services to public sector organisations, you will want to consider the new rules. Your accountant should be able to advise.
One to thing to make clear – just because the engagement is in scope, it doesn’t mean that IR35 applies. If it didn’t apply before, it still doesn’t apply now. The difference now is that (in the public sector only) the client will need to be convinced of that, which, depending on the client, could be a challenge. Also, if IR35 is deemed to apply (in the public sector only) the tax will be deducted at source, via RTI.
Is there a difference between working via an agency and working via a large private consultancy firm who has an overall contract to supply a range of services via a range of individuals? for the private consultancy with say 20 employers and 5 contractors - would all their contractors be in IR35?
This example sounds slightly different to the one above and it might be that in this instance the new rules do not apply. However, you will want to make sure this is correct and you should seek professional advice.
The question of whether the contractors (or more accurately, the engagements) are in IR35 depends on the underlying working practices. Can substitutes be sent? Are the contractors under supervision, direction and control of the client? Etc.
If a contractor is contracted by a consultancy, like one of the big 4 consultancies, will the consultancy be responsible for the IR35 check? or does it not apply?
We have had a couple of questions along these lines. I think in theory, if the ‘Big 4 co’ is acting as an intermediary, the engagement will be in scope (again – this doesn’t necessarily mean it is IR35 caught). In practice however, it might be that there is a sufficient degree of separation under this kind of arrangement.
What's to stop groups of contractors grouping their PSCs under an LLP structure (thus giving 2 levels of separation between the contractor and the end-client?
As long as there are no commercial barriers to this arrangement, I cannot see why it couldn’t be done. I think in this instance the LLP would become the intermediary and it could become liable for tax if the IR35 determination is proved wrong, but that would at least wrestle the liability away from the client. However, if the contractors became partners in an LLP, their tax treatment would be quite different anyway.
I am part of a small contract team (7 people) delivering a BI solution to a public organisation. We are discussing with the public body about setting up a new company to provide our services through a single consultancy entity. Do you think this would avoid the problem?"
In theory the new company would for all intents and purposes be a ‘PSC’ and the new rules would still apply but it sounds as if the client in this instance would agree that you are not disguised employees and would make the correct IR35 determination anyway.
I have 1 x public sector engagement (engaged as and when required) and 4 x private sector engagements one of which in Denmark. If the public sector contract is deemed IR35 would this affect the other 4 x private sector engagements?
No, it won’t affect those other engagements. Each engagement is considered separately for IR35 and the public sector version of IR35 will not apply to private sector contracts (for the time being at least – see answer to the private sector question).
Do the IR35 changes regarding the public sector apply in the same way to two Director companies as well as single Director companies? How will the second Director be taxed in this eventuality if they are not contracting for the given assignment?
The number of directors within the contractor company (PSC) is not relevant. IR35 applies (or doesn’t apply) to an engagement, not a company, nor a company director. If one director works on an engagement in the private sector, while the other works on an engagement in the public sector, both engagements will need to be considered separately for IR35. But the one in the private sector will make the decision on whether IR35 should apply, and if it does pay tax using the ‘deemed calculation’ at year end. In the public sector, the client will make the IR35 assessment and, if it decides IR35, should apply, tax will be deducted at source as if the contractor were an employee.
I currently work in a University, however, I am working on a project that has an "end of life". My understanding is that if you are working on a temporary project you will not come under these rules - is this correct?
No, sadly not. The new rules will still apply. But the fact that the project has a well-defined deadline is good pointer away from IR35. Hopeful your client will agree with this and you will be able to continue as you were, but it is likely that other factors such as personal service, and supervision, director & control will also be considered as well.
I have just begun a contract in the Public Sector for the first time. Will being forced under IR35 come April affect the legitimacy of previous contracts or future contracts in the private sector (which are deemed to fall outside ir35)?
No. Each contract is considered separately. You could have two contracts concurrently – one could be ‘inside IR35; one could be ‘outside’.
I am a contractor in a public sector organisation in Scotland - as more tax powers are devolved, is there any opportunity at all for the Scottish Govt to deal with this policy differently?
Currently, no. This is a UK-wide measure.
Working via an Agency:
Do the new rules apply if working via an agency?
Yes, the new rules apply if working via an agency but it will ultimately be the end client that decides whether IR35 applies.
Can an agency disagree with the End Client assessment?
Yes, I believe it can but it would be going out on a limb. If it is wrong it would liable for tax.
How will agencies have to deal with and react to these reforms?
The liability to apply the correct tax treatment rests with the entity that pays the contractor. Often this will be an agency. But it is the end client that will determine the IR35 status of the engagement.
If the IR35 determination is not received automatically, the agency can request it and the public sector client must provide it within 31 days.
The agency can query the decision. Again, the public sector client then has 31 days to respond.
Do Opposition parties support IPSE's view on this?
Through tireless lobbying and the much appreciated help of our members with the letter writing campaign, we have found pockets of MPs that are somewhat supportive. The problem is the Government has been seemingly successful in casting this proposal as an ‘anti-avoidance measure’, which MPs are reluctant to argue against in the current climate.
The Online Tool:
Is the tool based on the current Working Practices Questionnaire?
We do not know what the tool is based on or how it works. We haven’t yet seen it. If it is to be accurate it will need to factor in years of case law. We believe this will be difficult to achieve.
Do you have an idea when you will get to see the tool?
We expect to see it in January.
When the client determines the status using the tool, will that be at the start of the contract, say before the work has started? If so would this give us the opportunity to then back out of the contract without having worked upon it?
Yes – this is the Government’s vision for how the rules will work. The role will e advertised as ‘inside IR35’. It’s more difficult for pre-existing engagements.
Is the online tool likely to be challenged in tribunal when it's eventually unveiled?
I think it would need a test case, and then it wouldn’t really be the tool that was being challenged; it would be the client’s assessment of IR35 status. But it would be very interesting if the client’s defence of their assessment was based on the outcome the tool has given them. In such an example, the tool would indirectly be challenged.
Will it be mandatory to complete this online tool?
No the tool will not be mandatory. It’s there to use as a guide. It will be available for anyone to use, including clients, agencies and contractors in the private sector, should they choose to.
Do we know what training will be given to IR35 assessors other than the online tool, and how will HMRC ensure the training has been undertaken and passed to a satisfactory level to be effectively an extended HMRC representative?
Very good question. HMRC has said it will ‘be available’ to answer queries from public sector hirers, but given their reputation for being difficult to get hold off, people are naturally concerned that hirers will be left scratching their heads. This is one our big problems with the measure. Hirers will not understand IR35 and will therefore feel compelled to say IR35 applies to all their engagements for fear of non-compliance.
How prepared do you think that the Public Sector organisations are prepared to implement the new regulations?
I think some will be more prepared than others. Some have tax teams and well informed HR teams within the organisation. Others I think will be completely unaware of this and will have never have heard of IR35.
Please don't forget that HMRC are trying to clamp down on "disguised employment", If contractors are not truly in disguised employment then they shouldn't be too concerned.
100% agree with this statement. The only concern is that a client might decide it is too difficult to assess all its engagements and just apply the broad brush of IR35 to all of them. Something not dissimilar to this recently happened at the UK Hydrographic Office, resulting in around 95% of their contractors walking out. Hopefully though, clients will be savvy enough to at least exclude those cases that are clearly not ‘disguised employment’.
How will IR35 status be judged:
Does HMRC recognise the difference between contractors doing operational roles and project roles?
Having a clearly defined project role is certainly a helpful pointer for IR35 but it is the working practices that really make the difference. Personal service; Supervision, Direction & Control; Mutuality of Obligation are still the central pillars upon which IR35 status is determined.
Any idea what information the end client will use to determine the contractor status?
The end client will have to consider the terms of the contract and, more importantly, the working practices of the engagement. In particular they will need to consider Personal service; Supervision, Direction & Control; Mutuality of Obligation -the central pillars upon which IR35 status is determined.
Is this a delaying tactic for Brexit as it will surely have an effect on this?
I don’t think it’s a deliberate delaying tactic but we agree that at a time when the public sector is particularly stretched due to complex Brexit negotiations, implementing this measure is especially nonsensical.
You mentioned the BBC were looking at retrospective checks, can you signpost us any announcements relating to this so we can understand further?
We don’t know much more than has been reported in the media, for example:: https://www.theguardian.com/uk-news/2016/oct/07/hmrc-investigates-bbc-pr...
VAT flat rate
The VAT flat rate scheme is changing. Businesses will have to decide if they are a ‘limited cost trader’. This means they spend less than 2% of VAT inclusive turnover on goods for the business. (less than £1,000 a year in total).
Limited cost traders will have to use a new flat rate percentage of 16.5% irrespective of the type of business they are.
Expenditure on services is not mentioned.
VAT change from when?
Doesn't it mean there is very little advantage to be on Flat Rate after the changes because 20% on net is 16.66% on gross and you have to pay over 16.5%?
Yes, this is correct and I made a mistake during the webinar when relating this information. The change results in a dramatic reduction in the VAT retained to cover expenses. Here is an example of the difference in the "profit" that the change makes:
On a £10,000 net value, at the moment you have £260 to cover your input VAT and costs. Under the new scheme, you have £20 to cover the input VAT and costs, so there is a dramatic increase in the cost to the business.
Will the 2% of turnover spent on goods also include payments for services, or is it for physical goods only?
There is a lack of clarity over whether services are covered in the new rules or not – for many contractors, the majority of their expenditure is on services, including accountancy, hotels, flights etc. We are seeking clarification on this point. The Government published an explanatory note on the change but again services were not mentioned.