Posted on 3/05/2017 by

IR35 Public Sector Legislation Changes: Frequently asked questions​

IR35 giving you a headache? Here are some frequently asked questions about IR35 and the new rules to make your life easier.

IR35 can be confusing. We’ve compiled a list of questions we regularly receive from our candidates, along with information around the new IR35 rules. If your question isn’t answered below, please contact your recruitment consultant or your accountant for more information.

Please note, whilst 4SWconsultants will always do our utmost to find you the best assignment to suit your needs at the best possible rate of pay, we are unable to offer financial advice. Please seek professional advice from your accountant or tax expert to determine the best payment method for your situation.

What is IR35?

IR35 is a set of rules that aid HMRC in determining the tax and National Insurance contributions that should be made by people who are contracted to work for a client through an intermediary. This means people who work for a client through their limited company, a service or personal service company (PSC) or a partnership.

The legislation was introduced in April 2000 and is also known as the ‘intermediaries’ legislation’.

The idea of the legislation is to ensure that everybody who should be classed as an ‘employee’ for tax purposes, pays PAYE tax and National Insurance contributions as an employee would.

Contractors that would be classed as an employee under the legislation are often called ‘disguised employees’.

Types of Intermediary:

Personal Service Company (PSC)

The term Personal Service Company was actually coined in the wake of the IR35 legislation to describe the particular conditions under which IR35 would be applicable. However, there is no set definition of what constitutes a PSC. The below conditions would typically be classed as a PSC:

Limited Company

For IR35 purposes a UK registered limited company that may be flagged where the contractor:

• is a Director of the company
• is the sole shareholder of the company, or often split 50/50 with their spouse / partner
• managers and controls the company’s bank account
• supplies professional services to agencies, such as recruitment agencies, or directly to clients via the PSC.

Umbrella Company

For those who don’t wish to set up as their own limited company, umbrella companies offer an alternative. An umbrella company acts as the contractor’s employer, and then act as the intermediary between the contractor and the recruitment agency or directly to the client.

They will then arrange the payment for your work.

What were the April 2017 changes to the legislation?

From April 6 th 2017, the UK government changed the legislation so that, where IR35 applies, rather than tax and National Insurance contributions being determined by the intermediary, they should now be determined by the hiring party (either the client or the recruitment agency), and the necessary contributions be paid to HMRC directly.

The public body that receives the service from the contractor, from April 6 th 2017, is responsible for determining whether a contract falls within the IR35 rules, and will make the relevant deductions from the contractor’s fee. The public body may include an NHS Trust or Health Board, council office or other local authority.

Will I be affected??

The exact roles that will be affected by the changes is determined by the NHS Trust or Board where the worker is actually delivering the service. A new online tool has been developed by the government to help public sector employers calculate which agency workers they need to start deducting tax and NI contributions from at source.

Existing communications we have received are that all NHS agency workers currently paid by a recruitment agency, limited company or umbrella company, i.e. not paid as a PAYE employee, will be affected.

4SW recommends speaking to your accountant or umbrella company contact to understand if, and how, you’ll be affected.

We also request patience and understanding through what may be a difficult period for agencies and contractors and the changes bed in. Whilst we always try our utmost to ensure a smooth transition, there may be instances where we must work together for the best possible outcome. 

I’m a limited company contractor, should I work through an umbrella company instead?

Moving to an umbrella company is not necessarily the right solution, though it could be. Once again, 4SW recommends that you seek advice from your accountant or umbrella company representative to discuss the optimal payment model available to you. We can supply a list of

Do the new IR35 rules affect all agency roles?

The new rules only apply to contractors supplying services to the NHS and the Public Sector so any work with in the private sector remains unaffected.

This doesn’t mean you can no longer work for the NHS. 4SW will continue to support the NHS with the best resources possible. These tax legislation changes are just that – tax legislation – and do not impact on your ability to choose who to work for.

Do the changes mean my take home pay will be reduced?

The new rules are designed so that, for contractors deemed to be working through an intermediary, the party paying the fees will deduct the National Insurance and PAYE contributions from the contractors pay packet to pay directly to HMRC on your behalf. This could mean that, if you weren’t previously paying National Insurance or PAYE, you may see a reduction in your pay packet equal to these contributions.

But I work through a recruitment agency, am I affected?

The changes will affect any worker providing services to the NHS or Public Sector bodies who isn’t currently paid via a PAYE format. If you are paid by your recruitment agency on a PAYE basis then you will not be affected. If you are engaged via a recruitment agency on a limited company contractor basis, depending on the nature of the contract and assignment, then you may be affected,

So, does this mean there’s no point having my limited company?

There is no correct answer for this unfortunately. For instance, if you work multiple assignments then not all of them might fall within IR35.

4SW recommends that you seek professional advice from your accountant, who should be best placed to determine the impact these changes will have and the best approach for you to take.

What about working as a sole trader? Would that still fall under IR35?

IR35 affects all assignments where the worker is not paid under PAYE terms. As a sole trader you would still be ‘off-payroll’ and so would still be affected in the same way as a limited company contractor.

Am I locked to one agency or can I still work across agencies?

Again, this legislation affects only tax and National Insurance contributions and so has no impact on who you can work for. You can continue to work for the agencies you choose, and accept the assignments that suit you.

If I fall under IR35 for one contract, do all my assignments fall inside it?

No. The applicability of IR35 to a contract is determined on a contract by contract basis, not on the worker undertaking the contract. So for one contract you work with the NHS you might fall under IR35 and see contributions deducted from a pay packet, but for another in the private sector, for instance, you sit outside of it, and you will need to arrange your own payment schedule as before.

At the end of the year, HMRC will assess the amount of tax and National Insurance that you have paid throughout the whole year, across all your earnings, and determine at that point whether you have paid the right amount. If you’ve paid too much, you’ll be entitled to a refund, and vice-versa.

Who do I talk to if I’m outside of IR35 but see deductions being taken?

If, for a particular contract, you are not ‘within IR35’, then for that contract no tax or National Insurance contributions should be deducted from your fees. If you see deductions being taken where you think they shouldn’t, you should take this up with the body paying your fees.  This will be the NHS Trust or Health Board to whom you are providing your service, as the determination of whether IR35 applies to a situation is determined there.

It appears, at this stage, that in this instance the deductions will continue to be taken and you will be required to appeal to, and claim them back, from HMRC.  

How do I stay outside of IR35?

If you work under a limited company contract then the determination of whether a particular contract is ‘inside’ or ‘outside’ of IR35 will sit with the NHS Trust or Health Board into which you are providing your services.

They will make the determination and also deduct any contributions from your fees.

Who is responsible for these changes? Is it the recruitment agencies or umbrella companies?

These rules are nothing to do with recruitment agencies or umbrella companies; they are being imposed on the public sector by HMRC. Nor do agencies or umbrella companies determine whether IR35 applies to individual contracts. This is determined by NHS Trusts and Health Boards according to rules set out by HMRC.