A new article in Accountancy Age warns accountants that the likely extension of rebooted public sector IR35 rules to the private sector may hinder their contracting clients’ freedom by preventing them from paying themselves through a dividend structure.
The warning comes as the government proceeds with its consultation on pushing reformed IR35 rules into the private sector, despite extensive evidence that they caused chaos, disruption to services, and shortages of contractor talent in the public sector. Many independent professionals have abandoned the sector rather than being forced to pay employee-level income tax and NICs while receiving none of the statutory employment benefits these taxes fund.
The rules currently apply to all contracting professionals working in the public sector through their personal service companies, vehicles which enable them to receive payment in the form of dividends that are not subject to employee income tax and NICs. Unless that is, their working arrangements are designated as inside IR35 rules, in which case they are obliged to pay full employee deductions in the same way as their on-payroll, permanent counterparts.
The reformed rules shifted responsibility for determining a contractor’s tax status from the individual contractor, as before, to the public sector end client or the recruitment agency that engaged him or her. But determining IR35 status is complex and is based on years of case law. The decision to impose IR35 on the public sector was taken rapidly, leaving insufficient time for engagers to prepare for their new responsibilities and leaving them at the mercy of HMRC’s much-criticised and flawed Check Employment Status for Tax (CEST) tool.
The rules do not apply to contractors working via Umbrella Companies, who have tax and NICs automatically deducted from their incomes by the Umbrella on a PAYE basis as employees, although they keep their flexibility fully.
Should the rules come to the private sector, as expected, more contractors are likely to be affected as the sector is larger than the public sector by several orders of magnitude.
After warning of the freedom-restricting nature of an inside-IR35 designation for personal service company contractors in the private sector, the Accountancy Age article states: “…being inside IR35 will not drastically change the nature of their [contractor] business and there are still opportunities for them to work tax efficiently. They are still able to claim tax relief on any expenses which are incurred exclusively for their business, can still sign up for the Flat Rate VAT Scheme and may also be able to pay any income via dividends if it is not subject to PAYE tax.”