Death of the Contractors PSC – Impact of IR35 reporting requirements 2015?
Could this be the death of the Limited company IT contractor? It is very clear that few people are aware that the Intermediaries legislation and the reporting requirements could severely affect their business.
Largely the deadline date of April 5th seems to be looming with very little awareness from Limited Company contractors and Recruitment agencies as to how it will affect them.
From April 6th any Financial intermediary (the definition includes an IT Contractors PSC) will have to deduct full tax and National Insurance (probably rendering their PSC uneconomic) UNLESS the Intermediary can demonstrate that that the Individuals not subject to (or to the right of) direction, supervision or control by any person. It is very clear that the intention of HMRC is to drive anyone to PAYE unless it is clear that they are not subject to Direction, Supervision or Control by any person.So why is this so new and alarming. Well firstly for a decade Limited company contractors have lived with IR35 determining through the definitions of Employment and the Substitution clause whether they were adjudged to be a genuine business of their own accord (outside IR35) or a disguised employee caught by and inside of IR35).The difference was if caught by IR35 full tax and national insurance would be due to be paid.The Revenue tried to make this clearer using the business entity tests which they are withdrawing in April 2015. HMRC are replacing the test by taking the stance that they assume the contractor is subject to PAYE because they are being subjected to Direction and Control unless the PSC can prove otherwise.
So what is the problem? Fundamentally to ensure compliance the HMRC hold business with the end client “the Agency” in 82% of all IT Contracts classified as the “specified Intermediary” requiring it to submit a quarterly report the to HMRC on how and how much and when the contractor is being paid through a Limited Company. They will be subject to large fines £3000 per person and £600 a day thereafter for not reporting and can be held liable for the tax and national insurance due to the HMRC. This will mean Agencies and any specified intermediary will have to have auditing powers and show due diligence in obtaining the information for HMRC.All contractors working through a PSC as a temporary worker will have their income reported on more than once with the ability to cross check the reporting for any contradictions. The reality of this is that any IT Contractor or Limited Company contractor operating through a PSC will have to prove that they are working free of any Direction , Supervision or control or pay up rendering their PSC uneconomic. Additionally many agencies may decide working with a limited company contractor in many professions or Industries is too big a risk and force contractors to go PAYE on their payroll or an Umbrella company’s. If this really bit home many IT Contractors would consider permanent work over contract work as a better option and the number of contractors available drastically fall destroying the UK flexible market place.
I am sure most Agencies will not want the additional administration this legislation will cause and most contractors will not want the uncertainty it will cause. I believe that while the legislation is claimed to be aimed at lower level contractors it affects top IT professionals and career contractors just as much unless they can work with clients and intermediaries that will give them a contract and working conditions which they can prove are free of direction control and supervision. Whatever the outcome April the 6th will see an appalling increase in administration and reporting for Intermediaries (usually agencies) and PSC’s the limited company contractor. Consequently I would advise every Limited company contractor to ensure that they have appointed a Qualified accountant and tax adviser and additionally take professional advise on IR35 on every new or change of contract. Every agency should insist on this with the right of transparent reporting and auditing in their contracts with each PSC or Limited company supplier. The days of just needing a bookkeeper and filing an annual return are long gone! I intend to write further on this topic because it is so critically important to so many people!
As a professional organisation we are taking advice but clearly believe we can help both contractors and agencies working with us reduce their administration as a result of this legislation and stay compliant avoiding any “run ins” with HMRC and the worry of difficult reporting.