The Need for an Uplift

Senior Client Accountant Gavin James shares his personal thoughts on the Public Sector reform of IR35

So here we are again. Contractors, accountants and umbrella companies alike, all left reeling from yet another hurtful waving of The Chancellor’s briefcase. Just twelve months ago we were in a similar place as we geared up for the new dividend tax rules for limited company owners and an absence of travel and subsistence expense claims for umbrella workers. We can now add agencies and public sector top-brasses to the list of those that are perplexed by the latest from Parliament, with the rolling out of the public sector IR35 reform this April.

One can’t help but think that it is partly a case of saving face.  The government insists on persevering with a 17-year old piece of legislation that has  come nowhere near to the tax recuperation it set out to amass.  A lack of clarity and many grey areas rendered it fairly unreliable from the get-go. What we do know about the latest tweak to IR35 is that it’s objective is ensuring that all workers within the public sector are taxed in the same manner, with the additional national insurance and employment taxes going some way to fill the UK’s large national deficit .

The new rules actually go beyond taxing workers equally, as there will be some difference for those who choose to remain as a service provider to the public sector via a PSC. An umbrella employee or a ‘regular’ employee will at least have the grace of a personal allowance in the calculation of their PAYE whereas those remaining as PSC directors will be hit with a basic rate (BR) coding, in addition to their class 1 national insurance. For these contractors, it has been a constant downpour on their parade; dividend tax in the basic rate, the near abolishment of the VAT flat rate scheme surplus and now the deemed net payment. Not to mention the foregone business expenses they have grown accustomed to claiming. The message from above is clear – there are no considerations or any recompense for the risk these workers take nor, it seems, any concern over the consequences this new enforcement could lead to such as a mass shortage of workers and the subsequent delays to public sector projects.

So, we know the proposals, we are unclear of the bizarre accounting required to handle the changes and we are skeptical of how reliable the new HMRC Tool for determining a worker’s status is. But what do we know about the impact to the PSC public sector contractor in quantifiable terms?

The examples below show the difference in take home amounts for two IT contractors, VAT FRS registered (14.5%), taking dividends in the basic rate (above £5,000) and an annual salary of £11,000 (net of Ees & Eers NIC). We’ll assume minimal expenses - let’s say traveling 100 miles per week and paying an accountant and an insurance provider monthly:

Tax Year 2016/17

Daily Rate

£300

£500

     

Monthly net turnover (4 weeks)

£6,000

£10,000

FRS saving

£156

£260

Total turnover

£6,156

£10,260

Less expenses

   

Accountancy

£140

£140

Insurance

£40

£40

Salary

£853

£853

Mileage

£180

£180

 

£4,943

£9,047

Corporation tax

£989

£1,809

Operating profit

£3,954

£7,238

Net dividends

£3,658

£6,695

     

Expenses repaid

£180

£180

Salary

£853

£853

Total take home

£4,691

£7,728

   

Under the new legislation in 2017/18, these contractors would take home £3,911 and £5,870 per month, respectively. This is a decrease of 16.6% on £300 per day and 24% for £500 per day. This is a significant dip in income for these skilled workers, so whilst agencies and end clients get their heads around their newfound RTI reporting requirements, accountants scratch their heads over the poorly thought out double-entry HMRC propose. One thing  is certain; public sector contractors will surely be demanding pay uplifts to contra the blows of IR35, post-6th April. And why wouldn’t they?

It is going to be very interesting to see how these changes play out in the new tax year and what it will take for public sector bosses to incentivise skilled workers to undertake their projects. And if it is through higher pay, where is that pot containing this additional funding? You can’t help but wonder if the extra funds from tax collections through IR35 will end up back in the pockets they were originally paid from - in public sector bodies.

If you would like some advice on negotiating an uplift please call 01296 468 483 or email accountancy@orangegenie.com

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Orange Genie Accountancy offers fixed fee accountancy packages to contractors and freelancers. Each client has unlimited access to their own dedicated approachable and friendly accountant. All Orange Genie Accountancy accountants are specialists in the contracting market, so they can give you bespoke, high quality advice.

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​And much more, includingaccess to wealth management advice, IR35 reviews and pensions planning. 

If you would like to appoint Orange Genie Accountancy as your accountants please either fill out our enquiry form or give one of our friendly expert accountants a call on 01296 468 185 or email accountancy@orangegenie.com

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