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2nd December 2016

Contractor PSCs hit by IR35 rules and 16.5% Flat Rate VAT

In last week’s Autumn Statement the Chancellor Philip Hammond set out a series of moves that will significantly impact those contractors currently operating as personal service companies (PSCs)/limited companies.

He confirmed that, as expected, limited co/PSC contractors working in the public sector will be, from April, subject to new rules whereby their agency or end-user will be charged with determining their IR35 status. If the worker is deemed to be caught by IR35 the agency or end-user would be responsible for applying tax and NI.

Hammond also announced that, in view of this change, these PSCs will no longer be able to deduct the IR35 5% tax‐free allowance, which was intended to reflect the costs of managing IR35.

Another announcement – this one unexpected – will impact on all contractor PSCs. From April, businesses with limited costs (such as contractor limited co/PSCs) will face a new flat rate of VAT of 16.5%.

This means those currently part of the Flat Rate Scheme (FRS) will see a significant reduction in the current level of benefit they receive.

While this change is clearly designed to halt the widespread abuse of this benefit, it will, of course, impact on legitimate businesses too.

An online tool is being developed by the HMRC to enable businesses to calculate the levels of VAT they are required to pay, based on the costs they incur.

The new legislation will be set out in detail in the Finance Bill, published on 5th December.

Do all roads lead back to Umbrella PAYE?

It’s true to say that it’s not going to be easy to be a PSC/limited co contractor post April next year.

As a result of new IR35 rules, public sector bodies may avoid taking on workers operating as PSCs in order to reduce risk. And changes to the FRS will certainly mean those workers who are part of the scheme see a reduction in the amount of benefit they receive.

But we don’t believe this will result in a wholesale move of people back to Umbrella PAYE. Neither does it mean workers can’t retain their limited status.

So now is not the time for knee-jerk reactions. It’s time to take stock. Over the next few months, we will consult with workers, illustrating the difference between their current arrangement and Umbrella PAYE, so they can decide which is the better option for them.

After all, our generic Umbrella PAYE option remains a robust option for workers looking to move away from PSC and for agencies wanting to retain the commercial and time-saving benefits of the services we provide.

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