Advice for social workers on IR35 tax changes coming into force this week

Don’t rush down the umbrella company route, seek advice as to your own situation and beware of 'too good to be true' schemes, say tax experts

With the new financial year looming, many agency social workers are still agonising over how to manage their tax affairs after 6 April. Incoming changes mean most of them – including those who have until now run their own business via a limited ‘personal services company’ – will now pay tax and National Insurance at source.

The reforms to ‘IR35′ rules effectively determine whether contractors are behaving like employees, and so should pay tax like them; for example because of the level of ‘supervision, direction and control’ they receive.  They are causing panic as social workers seek to ensure their status matches the work they actually do in the eyes of the taxman.

Several social workers we interviewed recently about how the changes will affect their lives said agencies were steering them in the direction of working for an umbrella company, which experts say amounts to a tacit admission of ’employed’ status, even though HMRC’s online Employment Status Service (ESS) decision-making tool places them outside of IR35.

The picture has been muddied further by some local authorities apparently taking ‘blanket’ approaches that declare all their agency workers to fall within IR35, conflicting with HMRC’s instruction that public-sector bodies take “reasonable care” when assessing people’s status. We asked Sarah Kay, director of recruitment at the Taylor Davenport agency, and tax expert Carolyn Walsh, what advice they would give to social workers.

Three options

Agency workers deemed to be within IR35 must all pay income tax and national insurance contributions but have three options open to them. They can choose to go directly onto agency payrolls (on a reduced hourly rate), work via an umbrella company (via which they should accrue some employment rights, such as holiday pay) or stay responsible for their own limited company but be taxed at source.

Sarah Kay, director of recruitment at the Taylor Davenport agency, said confused social workers had been approaching her firm either because they had received no communication from their existing agency, or because they felt they were only being offered the umbrella option. Kay warned that vested interests were likely to be playing their part. “I am receiving five or six calls a day from umbrella companies offering kickbacks [in exchange for referrals],” she said.

Kay said she advises all social workers to talk to an accountant about their individual situation, and if they are going down the umbrella route to look at firms approved by the Freelancer and Contractor Services Association (FCSA) trade body. She said 75% of social workers on her books had decided such “reputable” umbrella companies were on balance still the best option for them.

Standing your ground

Walsh added that social workers with serious reservations about being placed within IR35 – for example, independent assessors or contractors undertaking project work with complete responsibility for managing their work patterns – should hold their ground and stick with their limited company.

“They can use the test result from HMRC’s ESS tool setting them outside of IR35, and write to their agency to say, ‘Although you are deducting tax at source, I don’t believe these are lawful deductions,'” Walsh said. “Then, they can write to HMRC and if the taxman agrees then they will no longer face deductions and can apply to have them refunded. If on the other hand you go through an umbrella company, you’re gone – that’s the end of it.”

Walsh told Community Care that for many social workers within IR35, the umbrella company model, which often involves people paying employer’s as well as employee’s National Insurance contributions, was unlikely to leave them significantly better off than going directly onto an agency payroll.

“Often with the umbrella route, holiday pay is rolled up within the pay rate; any accrual of holiday pay is therefore paid for by a deduction from workers’ hourly rate,” she said. “Responsibility for paying employer’s NI contributions is paid by deduction from the rate too.

“NI contributions were envisaged by HMRC as being paid by agencies – but instead some have passed them on to workers, via umbrella companies because of a desire to protect their margins,” Walsh  added. “However, a few public sector bodies and agencies are paying the employer NI contribution in the form of a surcharge on current pay rates, which addresses this issue.”

Both Walsh and Kay warned that agency workers should steer well clear of any umbrella-type scheme offering a tax rate that seems too good to be true. Several practitioners have recently told us about schemes being advertised online via which earnings are paid partly as a loan (to be written off later), with the contractor taking home 80-90% of gross pay.

Last year Community Care reported on large numbers of social workers being hit with huge retrospective tax bills after being caught up in a tax scam; Walsh said that the loan schemes and other similar processes are already in the taxman’s sights.

“HMRC rules say that anything – they could pay you in cattle – that can be reasonably taken as remuneration for your services, is taxable,” she said. “Anything that sounds too good to be true is probably illegal – HMRC find something and next year, people are getting unwelcome letters.”

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11 Responses to Advice for social workers on IR35 tax changes coming into force this week

  1. Paul April 3, 2017 at 11:46 am #

    I agree. My agency says all locums can no longer be ltd. They also claim the local authority say this. However i work through several agencie and am not permanent to any. My current post was created for 3 months for specific pre ofsted i spection. The online tool says I am self employed but the agency refuses to accept this. Result? I am £200 worse off and as job is miles away £280 a week expenses I can no longer offset.

  2. Caroline April 3, 2017 at 8:42 pm #

    I will be leaving social work after 10 years in the field following the implementation of IR35.

  3. Stuart April 4, 2017 at 12:22 am #

    Alternatively of course, you could all just pay your taxes like everyone else should. They are after all, there to finance the continued existence of services such as those in which you are employed. And some other important stuff like the education of your children and the availabiliy of the nhs…

    • AgencyM April 5, 2017 at 7:10 pm #

      As a limited company I pay a lot of tax anyway. My issue is not being able to claim for hotel and travel when working away from home. These are genuine business expenses. It will make things more costly for outlying local authorities who struggle to attract staff.

    • Elaine April 6, 2017 at 8:53 am #

      Why shall I pay employers ni as well? What about sick pay? Training? Professional memberships? Expenses if working away (they are usually pay by the employer if permanent)

    • Mark Tuvey April 7, 2017 at 9:36 am #

      When a social worker is having to pay registration, training for CPD, travel and accommodation costs out of the ordinary to work in their roles, why should these costs not be taken into account and removed from employee tax? This is a simple case as it is with other Public Body professions of the government ruling with an iron fist where they aren’t prepared to make the changes that are necessary for those within the profession. Delivery of service is not on the agenda, money saving is the only aim and priority, simply the government want to sell off public sector services, they have done so with prisons, probation and parts of the NHS services and are now doing so with social care. The easiest way to do this is diminish a service, make it less attractive to work in so it fails, then it will be sold off.

    • Marie Shirley April 22, 2017 at 5:29 pm #

      It’s people and opions like this that stifle progress and keep people oppressed not getting what they work hard to achieve.
      Not waste any further time explaining the obvious but try to see the bigger picture. .. we have to pay taxes regardless… but to de-skill and marginalise a profession is so demoralising that is why people are leaving the profession in droves and I don’t blame them.

  4. John Doe April 4, 2017 at 10:29 am #

    Your well if the point Stuart, but then liberals normally are.

  5. Diogenese April 5, 2017 at 8:35 am #

    Leave, andleave now. If you are deemed to be inside IR35 they will come and get you for all of the work you already did as they can argue you were inside IR35 at that time also. To be honest, anyone in the healthcare sector who has been operating Ltd. company is in trouble, unless you genuinely had multiple clients in multiple sectors. Talk to your accountant, right now, no time to dick about and maybe too late already.

  6. Jacob Daly April 5, 2017 at 3:51 pm #

    Are there any benefits to maintaining the limited company whilst being taxed at source? Is this something that is still an option?

  7. msde April 6, 2017 at 8:10 am #

    I agree with Stuart we could all just pay our taxes and national insurance which in turn help us to have good services.