Does this signal the end for PSCs after 6th April?

Profit warnings by listed businesses dropped to the lowest level for three years in 2016. “UK economy-defying expectations” states the CEO of the REC (Recruitment and Employment Confederation) are just a fraction of comments to indicate the UK is still growing and long may it continue, as Recruiters have enough to weather with the introduction of some of the most radical changes to affect the recruitment and contracting sector in recent years! I’m of course talking about IR35 and the new rules around PSC contractors working in the public sector.

So I suppose on the surface it’s easy to see why Transport for London has become the first public sector body to react to April’s IR35 reforms by imposing a blanket ban on workers who operate through their own limited company (PSC). But is it just an exercise to alleviate yet more costly admin and compliance associated with the anticipated IR35 digital tool and the prospect of penalties for a “wrong decision”?

One thing’s for sure; this type of statement from TfL is way too early and will only serve to impede the attraction and retention of skilled contractors at a time when skilled candidates are in short supply.

We’re still awaiting clarity on some of the new legislation, but it’s certain that responsibility to pay tax if IR35 applies will move from the worker to the agency or third-party who pays them, although it will almost definitely be the decision of the end-user client, as to whether IR35 applies, regardless of agency involvement. However, the end-user must respond to a decision request within 31 days. If a reply is delayed, either to the agency or to the PSC (which can ask how they came to their decision) they, the end-user becomes responsible for accounting for PAYE.

We’re still at least 5 weeks away from the release date for the final version of the online test tool but let’s face it, HMRC has no incentive to release the model anytime in advance of 6th April. After all, the new legislation was passed to boost the Treasury’s coffers. Why give the contractor market more time to consider their model and find the perfect responses to give an “out of scope” result.

HMRC tell us it is “still under development following consultation” and realistically when considering the complexities of the legislation and the specifics of each contractor can it really be that clear cut? What Recruiters and middle software providers need is time; time to plan and make the necessary changes to their systems in order to be compliant.

In considering the HMRC prototype model, I can see why TfL, might have taken this early position. Tackling 55 questions for each of your PSC, makes the test onerous, but comprehensive. It’s a far cry from the relatively simple HMRC employment status indicator tool the contractor market has been long used to. It does seem, however, HMRC is leaving no room for the average public sector contractor, with the industry believing 80% plus of said contractors are wrongly declaring themselves out of scope.

From slides I have seen of the protocol tool, the first questions relate to the company structure, asks repeatedly about ownership and control, and whether the individual and family members can take more than 5% of any dividends, or assets if the company was wound up. Most contractors own 100% of their business, or at least the controlling half; so presumably, the answer to all these questions is going to be yes!

There are a number of questions about substitution and sub-contracting, which is nothing new and could be covered by the correct wording in contractor contracts and contracts between Recruiters and their end-user clients.

Now though, it seems that the test also homes in on supervision, direction and control, asking many questions around decision on daily tasks, whether the client is able to tell the contractor what work to do for the contract, when the contractor has to complete the work by, and whether the contractor can choose where to work during the contract.

One question asks whether the contractor holds “office” for the end user client, and no doubt will have significant weighting applied as a “yes”, inevitably would generate an automatic in scope result.

So what is an “office holder”? There is some uncertainty as to who or what is an “office holder” is, but simply put covers positions which have an existence independent of the person who holds it and may be filled by successive holders. HMRCs guidance explains that posts like "office manager" or "head of division" are not "offices" because they are disposable and exist for as long as the organisation requires them to. An “office” is likely to include posts where it is not at the discretion of an organisation, such as the position of director or company secretary.

There is still much we don’t yet know about how the new legislation will work in practice and the real extent of the difficulties it will cause probably won’t be apparent until we are in full swing after the 6th April. Does this mean the end of contract and locum supply with all public sector bodies having to adopt a policy of no PSC contractors like TfL have?

Absolutely not, there are many other reasons contractors might choose to still provide their services through their own limited companies, even if this means, PAYE will need to be deducted at source or they can seek alternative payment methods such as PAYE through their agency or an Umbrella.

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Commercial Services Group’s Recruitment Division are holding Kent and South-East London based contractor seminars and a webinar with tax experts during February, check our websites and and social media groups for more details.

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