QUESTION: I operate my own company and I provide my services to a number of public authorities and to the private sector. One of the public sector organisations is going to start deducting PAYE and NIC from payments to me. They say this is new legislation. I am confused and don’t know what to do.
ANSWER: There are estimated to be more than 250,000 personal service companies (PSCs) in the UK. They are often, but not always, ‘one man band’ operations that provide the personal services of their owners to clients and customers.
This type of company is common in, for example, the IT contracting space, and healthcare and energy sectors. The ‘public sector’ in this context broadly means any government body such as a local councils, the NHS, Ministry of Defence, the BBC, Channel 4 and other organisations.
From a tax perspective, providing services through a limited company can mitigate or defer income tax and national insurance contributions (NICs) for their owners. The government has long disliked these arrangements, and the IR35 rules were introduced in April 2000 to try to counter this perceived avoidance.
IR35 is designed to require PSCs to subject payments received to PAYE and NICs, which they would otherwise not be. The problem with the existing rules is that they are rarely applied by taxpayers, and HMRC simply does not have the resources to chase payment from all of the PSCs in the UK, meaning that very little tax is actually collected by IR35 in its current form.
From April 6, public sector organisations and agencies will be responsible for collecting PAYE from any contractors who use an intermediary and are affected by revised IR35 rules.
While the new IR35 rules will come into effect from this Thursday, they will initially only apply to the public sector and those contractors working through PSCs providing services to it.
Key changes include:
• Determining whether a contract falls within IR35 will shift from the contractor to the public-sector client.
• If a contract is deemed to be outside IR35, the contractor continues as before. It will be the agency or public sector client’s responsibility to foot the bill if the decision is later overturned by HMRC.
• If a contract is inside IR35, the agency or public sector client must deduct PAYE and NI before paying the contractor. The latter may still be able to operate through their own company but will be taxed as an employee. Various tax credits will be in place to prevent the contractor paying tax twice when their PSC receives the income.
The new IR35 rules apply to payments made on or after 6th April, so will include any prior work delivered but not yet paid for. We are helping companies prepare for these changes and advising them of these new rules.
Affected contractors will face larger tax bills and will need to revisit their tax status and business structures. Initially, the rules will only apply to the public sector, but PSCs are prevalent in the private sector as well.
If the new rules raise significant additional revenues, how long will it be until they are expanded?
:: Feargal McCormack (f.mccormack@pkffpm.com) is managing partner of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept liability for any direct or indirect loss arising reliance placed on replies.
