Umbrella Companies Forced on Public Sector Contractors
Are Umbrella Companies Forced on public sector contractors now?
It looks as if there are many contractors switching to umbrella companies in the public sector after the new Government IR35 rules. Indeed, many are switching from their current personal service companies into these umbrella companies.
This is a bonanza for umbrella companies. That’s especially for those operating in the public sector.
Bad IR35 News for IT Contractors
However, it is not great news for IT contractors and other freelancers.
They are, basically having to take a huge cut in their income.
The average contractor is likely to be £10,000 to £15,000 a year poorer because of this.
Many of these contractors have been operating legally for years inside personal service companies.
Many of them are not inside IR35.
However, with many Government departments now deciding to stop using contractors who operate through PSCs, they will still have to either pay the IR35 tax or move across to an umbrella company.
Using PAYE Umbrella Companies
It is more advantageous for them to use a PAYE umbrella company than pay up the IR35 tax.
However, the differential has eroded. That’s because the Government will no longer allow contractors in brollies to claim travel and subsistence expenses against tax if they are inside IR35.
Those public sector contractors have a choice. They can either pay a lot more tax and keep working in the public sector.
Or they can dump their public sector contracts and try their luck in the private sector.
Some have plumped for the latter but many have decided to make the best of it, at least in the short term, and are joining umbrella companies, switching out of their personal service companies.
It looks like the Government are going to get their way.
HMRC Lose Most IR35 Investigations
HMRC lost the vast majority of IR35 cases and investigations. Therefore they are not great judges of who is inside IR35 and who is not.
Now, they and the Government are doing it by stealth.
No longer can contractors decide their own IR35 status – at least in the public sector.
It will be the Government department who uses them who will decide contractors’ IR35 status from now on.
If the contractor is deemed to be inside IR35 the agency will now have to extract tax and national insurance before paying the contractor.
Government Departments Refusing to Take PSC Contractors
As Government departments are not experts on IR35 (who is?) they are taking the easy way out and refusing to take PSC contractors from now on.
The ones they already have they are telling they need to join umbrella companies before April.
It seems that there are enough contractors saying ‘no’, especially in the NHS, to jeopardise the success of current projects. This is likely to cost the Government millions of pounds.
However, the Government sees the bigger picture.
Extra Tax and National Insurance Contributions from Contractors
If they can get £10,000 to £15,000 a year extra tax and national insurance contributions from thousands of contractors, that will add up to a tidy sum.
It’s reckoned that the 200,000 current umbrella company contractors in the UK are contributing £2bn to £3bn more in tax and NI than if they used limited companies.
The Government wants more of this.
However, it is grossly unfair.
Contractors Paying IR35 Tax Even Though They Are Not Caught by it
Many contractors will now be paying tax as if they are inside IR35 when many of them are legally outside it.
The Government are basically intimidating their own departments into forcing contractors who are outside IR35 to pay tax as if they are inside it.
That is, basically, unfair.
Of course, one just knows that this is just a pilot project in the public sector.
IR35 Rules in Private Sector – Umbrella Companies Forced on Them?
The Government don’t have to change the IR35 laws in departments they run. They just have to change the rules.
However, once they have piloted it in the public sector you just know that they will cast their eyes on all that potential tax they could take from contractors operating through PSCs in the private sector.
It may be a case of umbrella companies forced on contractors in the public sector rather than paying IR35 tax or leaving.
However, this is a case of choosing between the devil and the deep blue sea.
See also HMRC Sets Public Sector Contractors Trap.
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