IR35 legislation in the public sector changed after April 6th, 2017, Most of the contractors that worked in the public sector were automatically caught by the IR35 legislation.
The consequence of these reforms was that the employer deducted tax and national insurance from gross fees.
Options contractors had after the changes to IR35 legislation in the Public sector.
- Some of these contractors became permanent employees. Therefore employers deducted tax and national insurance, paying them personally rather than the company. They would enjoy all the employee benefits enjoyed by permanent employees such as holidays, sick leave and national insurance, etc.
- Some were paid through an umbrella company thereby passing the responsibility of PAYE to the Umbrella Company.
- But like option one, they were paid personally rather than the business. They won’t enjoy all the employer’s benefits and also had to pay their employer’s national insurance by themselves.
- Some of the contractors choose that payment for their services is paid to the business directly. The employer would then have to apply PAYE on the income deducting tax and national insurance. They would have to pay for their employer’s national insurance, and under this choice, they wouldn’t enjoy any employment benefits.
- Some had the test done by their employee and didn’t fall under the legislation.
The consequence of Mode of payment under IR35 legislation in the public sector.
Each of these options has its tax and compliance implications.
Consequence Option one and two under IR35 legislation in the public sector.
The individual would not need their limited company for employment again. If the limited company is left dormant, the director would have to submit the company’s confirmation statement and account.
The mistake some contractors made is to close the business with the company’s house without filing their final reports to HMRC.
This act is wrong especially if the limited company has traded in the accounting year, thereby not paying the final tax. My advice is, thus, to get professional help and submit your last account before closing the company with the company’s house.
Consequence Option three under IR35 legislation in the public sector.
Under Option 3, the limited company is still trading as the money paid to the business rather than the individual.
- Where the personal service company charges VAT, it would calculate the gross amount cost to the public sector rather than the net amount.
- The VAT due would be treated as standard vat rules depending on the schemes applied.
- HMRC has stated that the Limited company would have to declare the net amount received by the limited company through the PAYE.
- They have also stated that the net proceed extracted by the contractor from the limited company can be treated as a non-taxable dividend. When the director withdraws this deemed dividend, it would be considered as salary to reduce the corporation tax.
The conclusion of IR35 legislation in the public sector.
Contractors that are affected by these changes must ensure they receive adequate advice.
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