How HMRC continue to confuse matters for Contractors and Agencies

Yesterday, HMRC published their consultation on off-payroll workers in the public sector (PSC’s). This sets out that from April 2017 public bodies or agencies (whoever is paying the PSC) will be accountable for making sure the PSC abides by IR35 legislation. However, HMRC pointed out that an online tool would provide a definitive answer to this meaning it would be a clearer decision.

In a previous article I pointed out that in theory this could be a great move for the sector depending on how it was administered in reality. Unfortunately, with the release of the consultation document it’s clear that additional legislation will add burden to agencies, public bodies and contractors.

The proposals from HMRC set out the following example which I’ve tweaked to match how this would work for an agency who is paying a contractor.

Contractor bills £2000+VAT, a total of £2400 gross

The VAT is set aside while calculations are made on the £2000 net.

The agency then deducts 5% for ‘notional expenses’ that it’s expected businesses incur (leaving £1900 and a pot of £100 for expenses)

The agency then must calculated the tax and national insurance as if under normal PAYE on the £1900 meaning (depending on tax codes etc…) tax will be £197 and employees national insurance is 147 leaving £1556 net pay. However, the agency then needs to account for employers’ national insurance at £169 meaning the agency has £523 to pay to HMRC on behalf of the contractor.

The agency then gives the contractor the £1556 net pay, the £400 accounted for VAT and the £100 accounted for ‘notional expenses’. But remember, this is a PSC contractor, so now the contractor would have to pay HMRC the VAT and pay any relevant business costs like accounting fees, insurances leaving the remaining for the company.

In real terms this means that if a PSC in this position isn’t earning over £40,000 per year it’s likely they’ll be worse off than if they were employed directly.

This consultation is open so if you’re a contractor or agency that this could affect there may be cause to get involved in the consultation process and have your say. Below I’ve added the consultation document which provides more detail

https://www.gov.uk/government/consultations/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation