IR35 For Interim Managers - Private Sector and Public Sector

IR35 change is the biggest revenue earner in the October 2018 Budget.

The Chancellor has extended the IR35 regime that currently applies in the Public Sector to the Private Sector. The reform will not apply to the smallest 1.5 million businesses and will be introduced in April 2020, giving firms longer to adjust. HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply. HMRC will continue to work with stakeholders to improve further CEST and guidance before the reform comes into effect. Detailed information is on this Gov.uk link. 

What is IR35?

IR35 is the UK anti-avoidance taxation legislation designed to tax "disguised employment" at a rate similar to employment. "Disguised employees" means in this context “workers/interim managers” who invoice a client via their own limited company and whose operational relationship with their client is such that if they been paid directly they may well have been deemed, in the opinion of HMRC, to have been employees of the client.

Interim managers who use their own Personal Service Company (PSC) in this way means that the income could be paid out in dividends therefore avoiding PAYE, NIC.

Current legislation allows the interim, operating through their PSC, to declare whether they are “within scope” or not of IR35. It is then up to HMRC to challenge that status. If the interim manager is then found to have incorrectly declared that they are outside of IR35 they would be liable to pay fines, interest as well as back taxes. Due to legal challenges this has been time consuming and not very cost effective for HMRC and therefore the Government has been seeking ways to improve its “tax take”.

Background to the change to Public Sector assignments

HMRC has never been happy with the tax status of contractors and some aspects of interim managers operating through limited companies and over recent years has generally tried to reduce the allowable tax benefits.  For example by restricting travel and other expenses to a fixed percentage of turnover.

The perception that interim managers and contractors are not paying their fair whack of tax has been reinforced by “bad press”.  For example in the case of Ed Lester and the Students Loans  Company in 2012  where he was Chief Executive but paid through a PSC.  This was uncovered by a BBC News Night programme and as a result of the publicity caused a government crackdown and review of all “off payroll” arrangements.

After a consultation and the 2016 Autumn Statement new legislation is due to come into effect on the 6th April 2017. The responsibility for determining whether an interim operating through a PSC is within the scope of IR35 will be taken solely by the Public Sector body (PSB) that engages the interim irrespective whether this is through an intermediary or not.  If HMRC subsequently challenge the PSB of an “out of IR35” decision and succeed it will be the PSB that will be liable for the back taxes fines etc.

The new regime only applies to engagements with PSB bodies. There is a long list of these. The obvious ones are: Central and Local Government; NHS; Police, Security forces; Education/Universities; BBC; Tfl etc etc. 

Effect of these changes on you as an interim in the Public Sector

If, as expected, these regulations do come into force from 6th April 2017 it will mean than even existing PSB contracts will be reassessed as to your IR35 status.  To assist the PSB in determining your status HMRC is developing for PSBs an on-line questionnaire and digital tool which is set for beta-test end of January for public release before 5th April.

As the PSB will now have the decision on your IR35 status and a contingent liability that if they get it wrong they will be liable it is very likely they will take the line of least resistance and assume that most are within scope of IR35. If so PAYE, NIC will be deducted at source by the intermediary or if contracted directly with the PSB by the PSB. Although you will be subject to these taxes you will not receive any benefits of employment. For example no; sick or holiday pay; maternity/paternity leave; pension contributions.

If the PSB determines you are within scope your take home pay is going to be substantially less than you currently enjoy through your PSC.

It is beyond the scope of this article to go into how an individual’s tax liability is going to be affected.  

In the member’s blog you have the opportunity to make your own comments and I have indicated some options open to you.

Interims operating in the Private Sector

Although these proposals will only apply to assignments in the Public Sector the “word on the street” is that HMRC intend to bed this in with the Public Sector and if successful it is more than likely then propose that it applies also to the Private sector as well after another consultation.

So worthwhile getting up to speed on this.

Useful IR35 links

Government Consultation Off Payroll

Contractor UK webinar - new rules  

Off payroll Government publication

TfL jumps the gun on those operating through a PSC according to Contractor UK

Public Sector updates below

Update 14/3/2017  Anonymous "Beta" HMRC tool link to assess whether you are in or out of scope. 

Update 7/7/2017   Legal challenge to IR35?

Update 2/8/2017   Daily Telegraph Latest

Update 25/10/2017  IR35 challenge to NHS Regulator

Link to members blog for your thoughts on the above or practical advice for others.

 

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To find out more about the INTERIMCONNECT Network can help or to talk through an interim management assignment call David Bryan, Director, confidentially on 44 (0)20 3858 7267 or please use the website contact form.

 

Updated 4/11/2018