IPSE has issued the warning as it says that from April 6 onwards payments could be subject to punitive new tax rules.
At the start of the new tax year all payments from public sector clients (or agencies in a contractual chain where the end-client is a public sector organisation), such as the NHS and the Ministry of Defence, could be made via the Real Time Information (RTI) system, which is typically used for employees.
Not an accurate assessment
Under new and controversial rules, public sector organisations are supposed to undertake an assessment of a contractor’s IR35 status to determine the tax treatment of any payments their company receives. (See: Responsibility for contractors' IR35 lies with public sector clients - Shout99, Dec 16)
However, IPSE says that evidence is already emerging that public sector clients are unwilling, or unable, to make the IR35 assessment for each of their engagements. As anyone who has worked in the sector since 2000 will testify, IR35 rules are complex and rely on knowledge of case law, individual contracts and working practices.
Instead they will simply force all contractors into the RTI system and effectively onto the payroll, regardless of their status and without considering whether this reflects the reality of the arrangement. Therefore, IPSE believes that from April 6 tax and National Insurance Contributions will be deducted at source, resulting in a significant loss of income for the contractor company.
Chris Bryce, IPSE Chief Executive, said: “We have little faith in public sector organisations making an accurate determination of contractors’ IR35 status. Some aren’t even going to try. Instead they will put all contractors onto the payroll, without even considering whether this is the right arrangement.
“That’s why it is critical that contractors are aware of the fast approaching deadline. All payments made after April 6 will be subject to the new legislation. This means that for many contractors, work done from February 1 is at risk. Any contractors which invoice one month in arrears, on 30 day payment terms, will need to get their invoices issued in the first week of March, or run the risk of falling foul of the new tax rules.
“Any work completed during March but paid for after the 6th of April will be subject to the new rules – I’d recommend insisting on weekly or even daily payments if you can in order to minimise the losses you will suffer as a result of this ill thought out legislation.”
The new digital tool
HMRC are developing a digital tool which is supposed to help clients in the public sector determine the status of their engagements. IPSE has seen an early prototype of the tool and is not convinced it will be accurate.
Mr Bryce said: “IPSE and many other independent experts warned the Government that the digital tool will not be able to work. IR35 is based on case law which means it is complex, subjective and open to interpretation. It’s hard to see how a digital tool will be able to make a decision on status that lengthy tribunals often struggle with. We will reserve final judgement of the tool until we see the finished version, but it’s clear that some public sector organisations are not going to use it anyway.”
IPSE is also warning public sector contractors that the period before April 2017 could be investigated retrospectively.
Mr Bryce said: “We asked HMRC to declare an amnesty on contracts which transit to the new tax arrangements in April. Unfortunately they refused and will not rule out retrospectively applying 2017 assessments to work done previously by the same contractors at the same client.
"For this reason we strongly recommend that, if you want to continue with a public sector client, you arrange for a completely new, properly worded contract to be in force from 6 April 2017. This should not merely be an extension of your current contract.
“We are already aware of many contractors who have turned down public sector work. We know there are many others who are contemplating terminating their current public sector engagements. The threat of retrospective investigation on contracts which are deemed to be inside IR35 after April, is likely to encourage more contractors to turn their backs on the public sector.”
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Susie Hughes © Shout99 2017