Off Payroll Workers
Off payroll workers are, quite simply, those workers at a company that are not on the PAYE payroll.
This usually refers to contractors, freelancers and consultants of various hues. In the medical profession it can be locums or it can be substitute teachers.
The Government coined this term.
It is used normally when they are trying to extract more tax from them.
Hired for Set Period of Time
Companies normally hire those off payroll workers for a set period of time.
For instance, the company might have a new IT project and they don’t want to take on permanent staff for this temporary hike in work.
If the project is written using new technology, the company may not have the skills inhouse to do the project.
They will then hire contractors, or off payroll workers, as the government calls them.
These freelancers will work along with the company’s on payroll workers to help to bring them up to speed in the new skills.
Most times the company will hire these contractors via a recruitment agency.
However, sometimes they take them on direct. That’s especially if they have done some work for the company before.
There are several different ways that an off payroll worker may operate.
Personal Service Company Contractors
Firstly, they may operate through a personal service company (PSC), which is a limited company for one person.
This is the most common method of operation used by off payroll workers.
The contractor has a contract with the recruitment agency. The recruitment agency have a contractor to supply the services of the contractor with the hiring company.
So, the company pays the recruitment company and the agency pays the contractor.
The contractor pays his, or her, taxes at the end of the year. He, or she, employs the services of an Accountant.
They can offset quite a lot of their business expenses using the personal service company. Also, they can save a lot of money by being paid in dividends rather than in income. They would pay themselves a basic income and then take the rest in dividends.
That way they don’t have to pay the higher rate of income tax. They save on National Insurance contributions too.
Umbrella Company Contractors
The second way that they can operate is by using an umbrella company.
They operate in the same way at work as personal service company contractors. They usually find the contract via an agency and do the same work as if they are a PSC contractor.
However, they operate as if they are an employee of the umbrella company.
If the Government set up IR35 to catch ‘disguised employees’ then these freelancers could be termed ‘disguised contractors’.
They operate just like normal contractors except that for payment purposes, and tax purposes, they are treated like employees of the umbrella company.
An employee ate a company which employed both personal service company contractors and umbrella company contractors would not be able to tell the difference between the two.
Umbrella Company Does the Work
They give their timesheets to their umbrella company and the umbrella company do the rest.
Then they invoice the client company or recruitment company. They deduct PAYE from the contractor, after any expenses claimed. Then they pay the contractor and send the tax to HMRC.
Umbrella Companies may have hundreds, or even thousands, of contractors on their books as permanent employees.
So, HMRC quite look forward to receiving these massive payments regularly.
Contractors IR35 Status
Contractors normally use one of the above depending on their IR35 Status.
If they believe that they are outside IR35 they will likely use a personal service company.
If they believe that they are inside IR35, they are likely to opt for an umbrella company.
Using a PSC they can normally save quite a lot in tax and can claim quite a lot in expenses.
In the umbrella they can claim much fewer expenses against tax – but more so than if HMRC taxed them as a permanent employee of the company.
Self Employed Contractors
This is the third category of off payroll workers. There are a lot less of these than for the other two categories.
They are different from the other two as they don’t have limited liability.
They may even be contractors who believe that they are inside IR35 and so cannot operate through a personal service company.
So, they may decide it is not worth paying regular monthly fees to umbrella companies. They may not believe that they have many expenses that they can claim.
Government Changing IR35 Rules
The Government have decided to change the rules pertaining to off payroll workers who operate in Government departments.
From April 2017, contractors who work in the public sector will no longer be able to decide their own IR35 status.
It will be their client, the Government department, who will decide if they are inside IR35 or outside.
Of course, they are unlikely to have the competence to be able to decide that.
Highly qualified judges have struggled with this.
Won’t allow the use of Personal Service Companies
So, what some Government departments are doing is saying that they will no longer use personal service company contractors.
Others are likely to err on the side of caution and decide that contractors are inside IR35 – even when they really aren’t.
Contractors can dispute this. However, the judge and jury here is HMRC.
HMRC Trap for Contractors
Also, if a department decides that a contractor is inside IR35 when the contractor has been using a personal service company previously, HMRC are likely to investigate the contractor for previous contracts.
This could land him, or her, with a bill in the tens of thousands going back years. They will add interest and penalties to what he owes.
Quitting the Public Sector
It has been predicted that many public sector contractors will quit the public sector.
However, those who have CVs that show they have worked for Government departments or local government are not going to be at the front of the queue for contracts with major banks, insurance or oil companies.
What many of them are doing is dumping their PSCs and going into umbrella companies. Indeed many of them are doing this right now.
They don’t want the risk of an IR35 investigation going back years.
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