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The imminent changes to IR35 have created much confusion, debate and stress to contractors working in the public sector.

With so much conflicting advice from parties with an overly keen interest in your finances, it has become impossible to know who to believe. I felt compelled to write and do my best to help break through this noise and provide some facts and guidance to help you find the most suitable solution for your circumstance.

Many companies have contacted Sanctuary, urging us to recommend their umbrella or Personal Service Company (PSC) accountancy services to our contractors. Like all industries, in the financial accounting sector, there are companies who operate compliantly within the law and those which push those boundaries as far as they can.

With the IR35 changes passing liability for tax onto the organisation, agency or third party engaging the PSC, you may think you are not at risk. However, if those organisations cease trading for whatever reason, the tax liability is shifted to you, the contractor.

Some of these services are offering up to 85% take home of gross pay, by offering loan schemes. Although loan schemes are not currently illegal, tax avoidance certainly is.

Loan schemes essentially split gross pay into two parts - part salary and a part loan, and only deduct tax from the salary part. Organisations promoting loan schemes will tell you the loan part is non-taxable and doesn’t count as income. However, HMRC says “In reality, you don’t pay the loan back, so it’s no different to normal income and is taxable.” 

I note from various contractor forums on the internet, that public sector workers have stated they have received notification of investigations from HMRC where they have used these schemes in the past.

All employment businesses must report the gross amount paid to contractors to HMRC and pass on the personal details of anyone using a loan scheme umbrella service. HMRC will review the gross pay and tax paid and any discrepancies will be spotted easily. If HMRC believe insufficient tax has been paid, you could end up paying additional taxes, penalties and interest as well as a fee to the loan scheme promoter. 

Read more about contractor tax loan schemes - https://www.gov.uk/guidance/contractor-tax-loan-schemes-can-cost-you-more

As we have seen recently, with companies like Costelloe Business Services Limited (now dissolved), there is no guarantee they will be around to take tax liability on your behalf. In the case of Costelloe, individual contractors were liable for retrospective tax bills of up to £45,000 after it was proven in court that Costelloe had failed to pass on the tax deductions it had taken from its clients to HMRC.

Currently, there is a huge push by umbrella companies to gain your business. I would strongly recommend you take their advice with caution. These services are being sold by sales people, who earn commission for gaining your business. We have heard from contractors that these organisations are selling based on no risk of tax liability to you. These sales people are not qualified to provide financial advice and you therefore have no comeback should they sell you an unsuitable service. 

Other organisations are based in the Isle of Mann (a well-known tax haven), you have to ask yourself why would they not base themselves here?

We support the Freelance & Contractor Services Association (FCSA) list of accredited members, they are organisations that operate to the rigorous FCSA Compliance Code and are audited annually, with a copy of the audit report sent directly to HMRC. The FCSA list is also recommended by the Recruitment & Employment Confederation (REC), of which Sanctuary is a member.

I do appreciate the inconvenience and stress the IR35 changes will be causing you. I am doing everything in my power to ensure Sanctuary supports our current workers in any way we can. The changes have meant Sanctuary too, has been forced to devote considerable additional resources to meet the requirements and help provide guidance to you. 

At Sanctuary, our stance has been clear since the first announcement of IR35 changes. You must seek the advice of an independent qualified accountant that has a complete understanding of agency legislation.

There is no single solution to IR35, the best option for you will be down to your personal situation, and the only suitable advice to help you decide can be from an accountant.

Kind regards
James Rook
Chief Executive
Sanctuary Personnel Limited

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