This post only applies to off payroll “contractors” (including locums or consultants etc) who are working in the public sector, such as for the NHS, a government agency, university or local authority and use a limited company to raise invoices.
Contractors working in the private sector will not currently be affected by these rules, although there could potentially be a risk of similar legislation in the future for the private sector.
Old IR35 rules
The old IR35 rules are explained in detail here, but basically if a contractor can demonstrate that they are not a “shadow employee” because they have rights of control over how/when they work, rights of substitution and no mutual obligations then they can raise an invoice via a limited company and avoid payroll taxes.
Under the old rules it was up to the contractor to decide if they were inside or outside of IR35, and so they could use their judgement or obtain professional advice about this. If HMRC disagreed with the contractor and believed that they were inside IR35, then the liability for unpaid salary taxes was on the contractor.
New IR35 rules from 6 April 2017
If the new rules are found to apply, then contractors will have to pay employment taxes similar to those paid via payroll/PAYE, even if they are using a limited company.
Under the new rules, it is up to the public sector body to decide if the contractor is inside or outside of IR35.
If the public sector body is later found to have made an incorrect decision then they will be held liable for the unpaid salary tax/NIC. Therefore, it will be less risky for public bodies to apply a blanket rule of paying all contractors as employees and deducting tax/NIC, rather than verifying whether each and every single contractor is outside IR35 and paying the full invoice amount.
Our understanding is that the NHS and locum agencies will be generally by paying all doctors and nurses via PAYE under the new rules. IT and other consultants may also be caught by the NHS or other public bodies.
Impact of new IR35 rules for public sector contractors
The fee payer (eg NHS or agency) will calculate income tax and employee NIC and deduct these from the fee payable to the contractor. The contractor’s limited company will get a tax deduction for the income tax and NIC, but will then have to pay a further 20% corporation tax on the profit.
However, if all the public sector net income is withdrawn as salaries then there will not be any profit left and this is exempt from income tax/NIC as it has already been deducted at source.
The 5% allowance normally available to contractors inside IR35 is also removed for public sector contracts.
Overall, we CANNOT see any significant benefits from using a limited company if a contractor will be caught by the new rules. The normal tax planning using dividends or multiple shareholders will be affected by the extra corporation tax that is payable on top of income tax/NIC unless all net income is withdrawn as salaries.
In this case, the contractor would be better off being employed directly via the agency/NHS without the limited company. The limited company can also be closed down.