HMRC IR35 Trap
Contractors should beware the HMRC IR35 trap that they are setting for Public Sector Contractors.
Since April 2017, contractors are no longer be able to decide their own IR35 status.
For the moment that is only for contractors in the public sector.
However, there is speculation that this is just a trial run for all contractors.
The Government can easily change the rules for public sector contractors without changing the IR35 legislation.
However, they may see this as just a pilot project.
Government Department Will Decide Contractors IR35 Status
It is now the client, in this case the Government department, which will decide the IR35 status of contractors from now on.
If they decide that the contractor is inside IR35 they will inform the contractor and the agency. The agency will then deduct PAYE and NI from the contractor’s income before paying him or her. They will then hand over the IR35 tax to the taxman.
How Government departments will have the legal expertise to decide the status of contractors is unknown.
HMRC IR35 Trap for Contractors
However, there is a HMRC IR35 trap here for the contractor.
HMRC have brought out an online IR35 test for contractors.
Government departments can use this to decide the IR35 status of their contractors.
They must send the names of the contractors who sit the test to HMRC.
And herein lies the IR35 trap.
Contractor IR35 Trap Sprung
If the contractor sits and fails the IR35 test, and HMRC consider him to be inside IR35, he will have to pay the tax. He will not be able to operate through his Personal Service Company whilst he works there.
Not only that, HMRC is likely to investigate contractors who previously operated through their Personal Service Companies but have now been judged by the Government department to be inside IR35.
Why wouldn’t they?
It’s an obvious thing to do.
Banned from Using Personal Service Companies
Some Government departments have already decided that they don’t want to take a risk on the consequences if they make a wrong IR35 Judgment.
At least two have decided that they will no longer hire contractors who operate through personal service companies.
For those departments who decide they will continue to hire contractors using PSCs, contractors must beware.
They are taking a gamble in trying to keep operating through their personal service companies while working in the public sector.
If they are right, and they are outside IR35, they are fine. They can continue to get the financial advantages of using a limited company.
Contractors Investigated for IR35
However, if they are wrong (or the test shows them to be wrong), they may well find that they are an easy target for investigation by HMRC for their other contracts.
They are, what one might call, ‘soft targets’.
Of course, this test will have no legal bearing.
Also, the decision of the Government department as regards a contractor’s IR35 status will have no legal bearing either.
The laws and the courts decide that.
Getting More Tax from Contractors
However, it is a great way for the Government, and HMRC, to intimidate contractors into either paying IR35 tax or joining an umbrella company.
HMRC, and the Government, typically get £10,000 a year more in tax and NI contributions from umbrella company contractors than they do from limited company contractors.
Rather than take the risk of being ‘discovered’ to be inside IR35 by a Government department, many public sector contractors are looking at Umbrella Companies instead.
It will be a big financial hit for IT Contractors, and others, who will lose about £10,000 a year on average by using the normal PAYE umbrella companies.
However, they may see that as better than a potential IR35 investigation that may take many years and may cost them tens of thousands in back tax, interest and penalties.
Contractors should beware this HMRC IR35 Trap.
Simply Umbrella – Simply the Best
New umbrella product Simply Umbrella came into being to solve this problem.
It adheres to all the new tax rules. They created it after the Chancellor’s spring statement.
It’s just like other umbrella companies in that the contractor is an employee of Simply Umbrella but they get to keep far more of their money than through an ordinary umbrella company.
It could be a great solution for both public sector contractors IR35 problems and indeed any contractor.
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