If you provide services to public sector organisations through your own limited company, it is likely that you are classed as ‘off-payroll’.
Depending on the nature of the contracts and the services you provide, you are subject to IR35 tax legislation to ensure that you pay the correct amount of employment tax and National Insurance Contributions (NICs). The IR35 legislation was introduced to ensure individuals weren’t using their limited company status in order to ‘disguise’ their employment to avoid paying tax and NICs.
Currently, you are responsible for calculating and paying the appropriate tax and NICs. However, from 6 April 2017, this responsibility shifts to the public authority that you are providing services to (known as the fee-payer). From April, the fee-payer will be responsible for calculating and paying the relevant amount of tax and NICs. The required amounts will be deducted at the source (as it would for an employee) and paid directly to HMRC.
The fee-payer will decide if the rules apply depending on the nature of the contract and services provided.
HMRC are shortly due to release The Employment Status Service, an online tool that helps the public authority to make a decision as to whether the rules apply. If you use an employment agency or other third-party to get work, you should also be able to use the tool.
The new legislation will allow for your company to receive a deduction up to the full amount of the deemed direct payment, so you won’t be taxed twice. You then have a couple of options as to how you will be paid by your company:
It’s also worth noting that you will still be required to report to HMRC on your company’s tax affairs in the usual way.
John provides locum services to his local NHS through his company, J Services Ltd.
John invoices the NHS £6000 fees + VAT of £1200
The NHS have decided that the new rules apply and deduct £1458 in tax and £416 class 1a NICs (at personal tax rates based on income of £6000 for the month), which it pays directly to HMRC.
J Services Ltd receives £6000 minus the £1874 deductions, making a total of £4126 plus VAT of £1200 (VAT will be dealt with in the same way).
John’s taxable income is £4126
John then needs to decide whether to:
The new legislation is clearly going to mean a major change for anyone providing services through a limited company to public bodies and also for the engaging companies themselves.