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PSCs inside IR35 – Keep Calm and carry out some research

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Written by Caunce O'Hara
Last updated March 28, 2017

A week on since the Finance Bill 2017 became law public sector contractors who operate through PSCs are facing a real challenge. Before April 6th PSC workers will need to have their employment status confirmed by those they work for, namely public sector bodies (PSBs).

With news that some PSCs who have previously passed IR35 status checks now being told by some public sector bodies they have to become PAYE employees the problem doesn’t end there. We have PSC clients who have been told by public sector bodies that even if status checks are carried out using HMRC’s online tool and they are found to be outside IR35 they won’t be able to carry on their contract unless they are on the payroll, in other words “Inside IR35”.

There may also be scenarios where some public sector PSCs will be able to carry out work and be paid by the PSB as if the PSC were an employee i.e. with tax and NIC deducted from that payment.  Careful accounting treatment by the worker and their accountants will be needed to ensure compliance with HMRC’s rules.

Suitable may not exist

Whilst it has also been mooted that there may be an exodus by many public sector PSC workers to the private sector, there remains a genuine concern that suitable roles may not exist in any significant numbers in the private sector for such workers.

With this as the backdrop it’s clear that action needs to be taken promptly by contractors as the 6th April looms. A debate as to whether umbrella companies offer a viable alternative for PSCs caught inside IR35 has emerged and the main issue of interest to contract workers is that of take-home pay. The debate seems to be arriving at the conclusion that if a PSC worker is inside IR35 their take-home pay is likely to be less than if the worker is paid by an umbrella company.

There are a few caveats in this assumption, mainly that the umbrella margin (the money the umbrella company takes for providing payroll services) is not prohibitive. Since the recent abolition of the 5% allowance given to PSCs to cover the costs of running their company incorporation has become less attractive.

Financial attractiveness of PSCs

In addition the changes in the VAT flat rate scheme that come into force in April will further affect the financial attractiveness of PSCs.

The news for PSC workers, given the above, is not encouraging and for those inside IR35 a further issue will arise where “fee-payers” (the PSB in most cases or an agency) will have to apply PAYE and employees NIC to “deemed salary payments”. This will result in a basic rate (BR) tax code being applied for the worker meaning claims having to be made for reliefs they may be entitled to and a waiting game for such reliefs to be applied months later in many cases via self-assessment.

Those operating via an umbrella company will have correct tax codes applied for each payment.

Whilst uncertainty prevails we recommend that you consider acquiring Tax Enquiry & Legal Expenses Insurance that provides defence costs should HMRC challenge your tax status or investigate your affairs.

Call 0333 321 1403 for a quote for your Tax Enquiry and Legal Expenses Insurance today.


Avatar
Written by Caunce O'Hara
Last updated March 28, 2017

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