Brian Palmer AAT’s tax policy adviser answers your topic tax questions.
By popular demand this month’s “Your Questions Answered” focus is on IR35 and Off-payroll working through Personal Service Companies.
Before responding to an excellent set of questions, I feel it would be helpful to summarise the impact of the recently introduced legislation (off-payroll working) affecting those contracting in the Public Sector.
An overview of Off Payroll Working
The concept of Off Payroll Working has only just been introduced into ITEPA (Income Tax (Earnings and Pensions) Act 2003), with effect from April 2017.
Currently it only applies to those contracting within the Public Sector.
The legislation (Pt 2 Ch. 10, ITEPA) has shifted the burden of deciding whether the intermediaries legislation applies to those contracting in the Public Sector to the Public Sector Body, the engaging agency or the third party making payment to the contractor.
Where it is decided that the contactor is an off-payroll worker, they must be treated as receiving earnings from employment, even though they are engaged through a paryoll for income tax purposes.
What’s more there’s is no automatic right of appeal.
Want to know more?
If you want to know more, Taxation magazine has published an excellent Off-payroll working article.
You also need to consider the legislation governing travel and subsistence, which has been in place since April 2016 concerning intermediaries providing services and supervision, direction and control.
Well Lynette, as you’ve probably already guessed when you posed your question, the answer is not straight forward.
In responding, I have broken my answer down into three different areas:
- Those working in the public sector who are treated as off payroll workers,
- Those not working in the public sector but who are required to comply with IR35, and
- Those engaged via a personal service company who are not subject to off payroll working or IR35 rules.
Those working in the public sector
Those working in the public sector considered to be off-payroll workers cannot claim much in the way of expenses. Other than, the same tax-allowable expenses that could be claimed by an employee working directly for a public sector organisation.
- Where possible it would be best for claims for eligible travel and subsistence, or similar expenses to be submitted to the engaging entity to be processed and reimbursed as part of the deemed wage calculation and payment process.
- While expense claims could be submitted by a contractor to their own company, this is unlikely to be the best course of action. Particularly, where all the income received into the company is derived from off-payroll working.
- A more practical alternative, is for the off-payroll worker, who is usually a director, to claim tax relief for work-related-expenses as part of their own post year-end self-assessment tax return process, or as a stand-alone claim. Either on line via the government gateway or by downloading and completing and submitting an HMRC p87
Those not working in the public sector but caught under IR 35 rules
PSCs with a contractor not engaged by a Public-Sector organisation, but deemed to be caught by IR35 rules are permitted to apply a statutory 5% deduction from their total net of VAT IR35-related income when performing their deemed employment payment.
The 5% reduction is an allowance for expenses which could have ordinarily been claimed as a deduction e.g. administration costs, which can include
- Administration and secretarial support
- Accountancy and tax advice
- Printing, postage and stationery
- Employer’s and Public Liability Insurance
- Training costs
- Computer equipment (if not eligible for capital allowances)
- Bank and overdraft interest
- Hire purchase payments
Contractors not within IR35
- Where a contractor operates via a PSC and is not deemed to be caught by IR35 the best option is for the employee to submit a claim for allowable travel and subsistence, or similar eligible expenses to their company for reimbursement.
No magic bullet
Sorry Claire, in the space of a 750-word blog I cannot offer a magic bullet.
In fact, there are people out there who earn their living from giving opinions on whether someone is, or is not caught under IR35.
To determine a workers employment status, other than in the off-payroll working scenario described above, a good place to start is to consider whether they are engaged under a “contract of service”, or a “contract for services”. The former will evidence an employment relationship the latter self-employment.
A checklist can provide a quick guide to the key employment indicators that may be used to denote whether an individual is employed or not.
Ultimately, no matter what’s written into a contract, what really decides the position is the actual relationship (performance against the contract) between both parties.
HMRC’s employment status checker
HMRC has its own online status checking tool, which they say can be used by a worker or an engager to establish the employment status of a worker. The department says that it “will stand by the result given unless a compliance check finds the information provided isn’t accurate.”
Although, what is written into it will be taken into consideration if HMRC was to conduct a status enquiry. It is much more about it is more about how the duties are performed.I know where your coming from Geoff, but as hinted in my earlier response it’s not what the contact has to say, or its length.
As one Contractor Weekly put it:
“Please note that whilst these contracts have been written with IR35 in mind, your working practices will hold more weight in an IR35 enquiry…..”
Brian Palmer is the tax policy adviser for AAT.