It is these contractors who are often referred to as ‘disguised employees’ and who are now being heavily targeted by the HMRC.
Of course the new IR35 legislations will mean big changes for contractors.
However, IR35 will mean even bigger changes for public sector businesses, clients, departments and agencies.
How? Why? For one, in the way the business pay their PAYE contractors; with businesses, clients and agencies being liable for the correct calculation of their contractors tax risk. They must accurately access each and every contractors IR35 status, judging whether they are actual contractors or in fact employees. Previously it was the responsibility of the contractor themselves. Needless to say, it is widely believed that the transition between businesses and contractors will not be a smooth one.
Tax and National Insurance
As a result, if it is deemed that a contractor’s contract falls within the IR35 ruling they will be treated as an employee and therefore their tax and NI contributions will be deducted from their gross earnings. Consequently, the contractor will not be able to pay his/her own tax and NI, having previously benefited from heavy reductions through their own limited Company or PSC.
In short this means that...
The public sector business/client/agency will determine the tax status of its contractors
The public sector business/client/agency will be responsible for calculating each contractor’s PAYE and national insurance contributions
Cutting out the Contractor’s limited company, personal service company or similar, each business/client/agency will have to pay HRMC directly
It therefore begs the questions...
Is IR35 an Accident Waiting to Happen?
Will the IR35 status cause severe rifts in usually harmonious contractor client relationships whereby a difference in opinion occurs? Almost certainly.
Are payroll departments at risk of inaccurately evaluating their own revised NICs? Most probably.
Now, such contractors will fall into the IR35 ruling and will need to pay tax at the basic rate from source, transferring onto a business’s PAYE/Off payroll working scheme. However, should Auto Enrolment apply then selected contractors will not be liable for deductions and a business will need to ensure they have ‘opted out’ from the pension scheme. The contractor will also not be entitled to the same benefits as an employee paid through the PAYE scheme. They will not be able to claim sick pay or holiday pay.
Confused? You’re not alone.
Whilst the changes have been known about for some time, little information has been available, leaving many public sector businesses somewhat in the dark about how it will affect them.
It’s a minefield... Want help? Need help?
Here at Calverton Finance we’ve been monitoring these changes closely. Through our PayFactory payroll solutions service our customers benefit from:
Complete peace of mind to public sector businesses that they are compliant with the new IR35 rulings
Ensuring correct employer’s national insurance contributions are met
Precise pension reporting
Complete ‘back office’ support from invoicing, financing, credit control and payroll management
So why let IR35 get the better of your company? Instead, contact us today, where you can speak to one of our experienced and professional Corporate Managers about our specialist PayFactory service, tailored to best suit your business.
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