IR35 - Public Sector Reform 12/12/2016

IR35 – Public Sector Reform

IR35 affects all IT contractors who do not meet HMRC’s definition of ‘self-employment.’ You can use HMRC’s Employment Status Indicator to determine your employment status. IR35 came about as a result of HMRC’s belief that a number of contractors are actually disguised employees.

HMRC has been unable to set clear rules and defined legally sustainable tests to determine whether the contract is ‘IR35 caught.’ Because of this, HMRC believes that there are still thousands of employees operating as contractors and so are set to make yet another change to IR35 to combat this.

The Autumn Statement 2016 which can be viewed here, says:

“The government will reform the off-payroll working rules in the public sector from April 2017.”

It adds: “This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.”

Judging by the above, reforms are intended solely for the public sector for the time being, but should HMRC find that the new reforms work they could be extended to the private sector too. Although there have been no official indications, this will be the case and many believe it is unlikely to be rolled out past the public sector.

The IT contractor will still have the general expense of running a business, but the government thinks that the entire 5% will be spent on determining their IR35 status.

HMRC is making end-hirers responsible, but they can immediately delegate that responsibility and liability to agencies. Essentially what they are doing is making a party responsible, but then allowing it to be passed on to another party who is separate from the assignment working practices, and therefore less able to take a view on IR35 status.

What else was announced? 
Other key Autumn Statement announcements include:

  • Corporation tax will fall to 17% by 2020 as planned.
  • The National Living Wage (NLW) will rise by 4.2% from £7.20 to £7.50 from April 2017.
  • A new 16.5% VAT flat rate will take effect from April 2017 for businesses with limited costs, such as many labour-only businesses.
  • The tax advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to pensions, childcare, cycle-to-work schemes and low-emission cars.

We’ll keep you updated with any changes to IR35 over the coming months.

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