Despite little coverage in the mainstream press, the changes to public sector IR35 rules apply from today.
The changes undoubtedly will see an increase in umbrella contracting, as agencies and public sector bodies attempt to head off the responsibilities of assessing IR35 status and calculating and operating deemed payments.
Public sector IR35 – the new way
As of 6th April (today), limited company contractors can no longer decide and declare for themselves the IR35 status of their contract. This decision is now down to the public sector body they are working for.
It is likely that many more limited company (also referred to as Personal Service Company or PSC) workers in the public sector will be “caught” by IR35 and the party paying them will have to operate “deemed payments”, i.e. deduct the same amount of tax and NI as they would for an employee.
This change to what the government call “the off-payroll working rules”, together with the removal of the 5% tax-free allowance for IR35-caught companies in the public sector, means that after April the take home pay between PSC and Umbrella will become very similar.
The Freelancer & Contractor Services Association (FCSA) is calling for agencies and umbrella companies to work in partnership to ensure clarity regarding contractors’ gross pay rates.
Umbrella as a solution
With more agencies and contractors turning to umbrella contracting as a viable payment method in the face of the changes to IR35, we thought we would clear up any confusion about how legitimate umbrella companies actually work:
- The umbrella company employs the worker. The worker is provided with all the statutory rights and benefits of permanent employment while they are engaged on a series of temporary assignments.
- The agency or client pays the umbrella a charge out rate for the worker’s time. This includes the costs of employing the worker, including Employers National Insurance, Apprenticeship Levy, pension contributions and holiday pay. These costs must be factored in to assignment rates.
- The umbrella company takes their margin. This is how umbrella companies fund their business costs, including the cost of statutory payments like sick pay and maternity / paternity pay.
- The umbrella company pays the worker through PAYE, just like any other employer.
Working in partnership
Julia Kermode, CEO of the FCSA, stresses the importance of good communication throughout the supply chain.
She said: “We want to encourage agencies to work with their umbrella firms on calculating the impact of employers NICS, the assignment rate and the resulting gross pay rate for contractors….we want to get away from the perception that umbrellas are “baddies” who just want to take their cut and deprive the contractor of their hard-earned money. Compliant umbrellas are a valuable part of the supply chain and a relationship between contractors, umbrellas and recruiters should be seen as a true partnership so that clients benefit from the workforce they need without any misunderstandings around pay rates, and so that contractors know where they stand”.
Still need a solution for IR35-caught workers?
Liquid Friday can provide easy low cost solutions for agencies to outsource the entire administration of their limited company payroll.
We are full members of the FCSA and have been supporting the flexible workforce for more than 10 years.