IR35 Options for Public Sector Contractors
There are three IR35 options for public sector contractors in the UK.
They are Take the Test, Leave the public sector or join an umbrella company.
We look at the three options here and how good or bad they are for UK contractors.
This is after Theresa May’s Government changed the IR35 rules for those who work for the Government as freelancers.
Deciding IR35 Status
Now, contractors will no longer decide their own status – in the public sector anyway.
Whoever, hires them in the Government department will decide their IR35 status.
That’s despite them not having a background that would enable them to make that choice.
If they decide that contractors are inside IR35 then agencies will have to deduct tax and national insurance from the contractors’ income and send it to the Treasury.
No Longer Using Personal Service Company Contractors
Some Government departments have decided to take the easy way out.
They have decided that they will no longer use contractors who operate through personal service companies.
It seems that lots of contractors have been contacting online contractor news websites to say that they are going to dump their contracts and leave the public sector.
If they pay IR35 or join umbrella companies there will be a huge financial hit for them, maybe averaging £15,00 a year.
So, what are the IR35 options for public sector contractors?
1. Try to Continue to Use Their Personal Service Companies
Some Government departments will not allow them to do that.
Others will – but normally only after they have taken the new online IR35 Test from HMRC.
The upside is, that if they pass the IR35 test, they will continue to be able to work through their personal service company whilst working in the public sector.
The downside if they fail the test is that they will have to pay the IR35 tax.
Soft Targets for HMRC IR35 Investigation
Another downside is that their failure of the test will make them a soft target for HMRC.
It is likely that they will investigate the contractor’s previous contracts where he, or she, operated through a personal service company.
The contractor could potentially find himself, or herself, under a major IR35 investigation for previous contracts.
That could take years and he, or she, could potentially have to pay out tens of thousands of pounds in back tax, penalties and interest.
So, unless the contractor can really show that he is outside IR35 then this is a very risky route.
IR35 Test Weighted in HMRC’s Favour
There is another major downside here.
More than 90% of contractors consider themselves to be outside of IR35 and so operate through personal service companies.
There was less chance of an investigation for IR35 than there is of being lightening striking you.
Like shoals of fish, or herds of buffalo, there is strength in numbers.
IR35 Investigations Had Very Low Success Rate
However, it is fair to say that when HMRC did investigate contractors for IR35, they had a very low success rate.
This time though, they are, via their new IR35 test, the judge and jury of the contractors IR35 status.
This test has no status in law.
The IR35 laws haven’t changed.
If experience of the previous IR35 test they created is anything to go by, it will weigh heavily in favour of most contractors failing it.
Contractors who fail can appeal – to HMRC.
This is sure to result in many contractors who are legally outside IR35, having to pay it because of a test with no basis in law.
So, what other options do contractors in the public sector have?
2. Leave the Public Sector
It seems that many contractors have already taken the decision to leave the public sector and will not renew their contracts.
Many Government projects will be hit badly by this, resulting in major delays and cost overruns to critical software projects.
The Government is shooting itself in the foot here.
Most code is written by people who have less than 2 years experience. That’s because permanent employees want promotions.
Contractors with ten years experience or more are happy to continue to code in return for more money.
Government IT Project Overruns
So, if lots of contractors leave the public sector over this there will be a big hit to the quality of Government IT projects.
The Government believe that this IR35 change will net them £440m.
They will have to set that against the overruns that will occur on critical projects and the poorer quality of the softare created.
Of course, the major consultancies are sniffing around hoping to pick up the work that contractors are leaving.
As we all know, the people that they would put in to replace the contractors will cost a lot more and have a lot less experience.
3. Join Umbrella Companies
The third option for contractors in the public sector is to join an umbrella company.
For most contractors that is only slightly better, financially, than just paying the IR35 tax.
It was only last year that the Government stopped umbrella company contractors from claiming travel and subsistence expenses against tax.
There are still a few things they can claim, although that has to be set against the monthly fees they have to pay the umbrella companies for processing their income.
Conclusion on IR35 Options for Public Sector Contractors
The best of the IR35 options for public sector contractors is if they are still able to use their personal service companies.
However, that is very high risk as the test is likely to be weighted against them.
And if they fail it they could be under IR35 investigation for previous contracts.
For those who can get out, that is the obvious thing to do.
However, if their experience is mainly in the public sector they are not going to be at the front of the queue for contracts in the banking, telecoms or oil sectors.
The IR35 options for public sector contractors are threefold.
Each contractor must make an individual choice as to what is best for them.
Will it be private sector contractors next?
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