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What Next for Contractors Working in the Public Sector?

Written by Jon Cooper

HMRC has finally published an update on their proposal for contractors working in the Public Sector including those working for HMRC itself. However, like the recent Making Tax Digital proposal, the key part is missing.

The kernel of the change that comes into effect from April is that the responsibility for deciding whether off-payroll working rules (aka IR35) should be applied to a contractor shifts to public sector authority that engages the contractor.

As well as national and local government departments, executive agencies and authorities, the public sector covers educational establishments and others such as the BBC, Channel 4, TFL and the Bank of England.

Where the rules are deemed to apply, the fee-payer will calculate Income Tax and National Insurance contributions and deduct them from the contractor’s fee for service.

An important point is that this reform applies to payments made on or after 6th April 2017 rather than work done after that date.

Given that most contractors invoice on a monthly basis, payment terms are generally thirty days and that there is often slippage, the reality is that the new rules in many cases will be applicable to the invoice raised for services provided in February.

The latest announcement states “Public authorities, agencies and third parties supplying contractors should consider existing contracts and prepare for the change.”

However, whilst confirming the name of the new digital service that will provide the HMRC view of the employment status of a worker will be the Employment Status Service tool, this is only “is expected to be made available by the end of February 2017.”

The idea for this service is that by answering a number of questions around the relationship between the contractor and the public sector client, the tool will provide an assessment of whether off-payroll working rules should apply. HMRC has previously committed to abide by the outcome.

On the basis that this software was originally scheduled to be in place before the end of January, we can only presume that developing this product to give a definitive view is proving challenging!

However, the fact is that both the public authorities and contractors are in limbo at a time where this new legislation will apply to work being done now.

The contractor in particular has every reason to be nervous. If the Employment Status Service tool indicates that off-payroll working rules now, logic dictates that HMRC could argue that this should have been the case since the inception of the contract.

We are already hearing that public sector bodies are opting not to engage contractors working through their own Personal Service Company.

One solution is for a team of contractors to band together and form a consultancy for the provision of their services.

A common misconception is that the remuneration from the sum of the whole would be less that from the individual components. As the VAT Flat Rate Scheme benefit is also being withdrawn from labour-only businesses from April, this will certainly not be the case.

Another is that if, say, four contractors form a consultancy the revenue would be pooled and divided equally so each would be entitled to a 25% distribution irrespective of their contribution to the pool. Having a 25% shareholding does not equate to 25% distribution rights.

So long as the company is incorporated with the necessary clauses in the Articles of Association and supported by a shareholder agreement to cover future events, each individual will be protected.

For this, the company formation is far beyond an off-the-shelf online solution. At CooperFaure, we specialize in creating company structures to ensure that the interests of each of the participants are protected.

If you would like any further information or to discuss the options, please contact us at tax@cooperfaure.co.uk.

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