There are many ways to categorise the different types of work available to contractors. One such way is to distinguish between public sector and private sector work.
In short, the public sector is largely controlled by the government, while the private sector is led by individuals. The private sector refers to any business or organisation that makes a profit and isn’t controlled by the government – other than the fact they pay tax.
However, there is more separating the two types of work than who controls them. When it comes to differentiating between the public sector and the private sectors, there are four key differences. These contrasts can also help you understand why there are variances for contractors in these sectors.
Read on as we break down the public sector and private sector for contractors, including IR35.
The key differences between public and private sectors
Because it has direct government involvement and funding, organisations in the public sector are subject to a lot more regulations than those in the private sector. These regulations may derive from your local, regional or national government. They could also originate from wider bodies such as the EU or the World Trade Organisation.
The motivations and ultimate objectives of the public sector are a lot more complex. Whereas those in the private sector may be driven by monetary sales, the public sector has more things to consider such as ‘social value’.
There are more people interested in how the public sector is spending their money, what they’re spending it on and in turn how well they’re performing. Of course, there are companies in the private sector who may have investors with many points of contact. These figures will have an opinion or some input, but very rarely to the same degree as the public sector.
Moreover, it won’t come as a surprise that transparency within the public sector is of utmost importance. In terms of legislation and general public opinion, there’s a lot of transparency to abide with. As an organisation that’s run by the government, the information of what exactly they’re doing will have to be accessible to any member of the public who wishes to see it. This includes things like contract pricing, equal opportunities and more.
When it comes to the private sector and their transparency, it’s not quite as strict. There is a certain level of transparency and compliance requirement, but they are able to withhold certain pieces of information should they feel it necessary.
What does this mean for contractors?
Moving on to what that means for contractors, there is one thing that’s in the spotlight – the IR35 legislation. Originally, IR35 did not apply to the private sector, but from April 2020, it will.
What is IR35?
Also known as the intermediaries legislation, IR35 was introduced back in 1999 before eventually becoming law in 2000. Ultimately, it is in place to prevent workers from supplying work through intermediaries in such a way they avoid paying tax or National Insurance.
It was up to those providing the services to determine the IR35 status. However, in 2015 HMRC decided that this was not working and there were too many companies that were not compliant. Fast forward to 2017, and the public sector legislation reform has resulted in the responsibility for determining IR35 status now being with the client.
IR35 – public sector
Since its implementation in 2017, all end clients classed as within the public sector are responsible for assessing their own contractors IR35 status. In practice this meant that most contractors were deemed inside of IR35 regardless of their actual circumstances. In the vent a contractor is found to be within IR35, the public sector client will have to either deduct PAYE tax and NICs from your fee before payment is made or check that their contractors are adhering to the IR35 tax rules (through evidence like payslips).
The main issue that has arisen from this is that when it comes to IR35, public sector bodies are not always accurate with their assessments. This has meant that some people have been paying PAYE tax and NICs when they didn’t need to, causing the price of hiring contractors to increase.
IR35 – private sector
From April 2020, any private sector client will now be responsible for determining whether your contact is inside or outside IR35. Private sector contractors will no longer hold this responsibility themselves. These changes are set to affect an estimated 170,000 people and can reduce the amount of take-home pay by up to £7,500 (for those earning £100,000 a year).
Your client will have to complete a status determination. This is in place to prevent ‘blanket rulings’ that put all contractors inside IR35. If you want to dispute this, there’s a new ‘client-led status disagreement process’ that is being introduced. This means you’ll only be able to dispute the status with your client. In addition to this, there will no longer be a 5% turnover allowance.
As defined by the Companies Act, there will be an exception for ‘small companies’, who will be exempt.
What can you do to avoid IR35 troubles?
To comply with IR35, both the wording of your contract and the way you work need to be representative of a self-employed person and not a ‘disguised employee’. Those who work under a limited company but fail to comply will lose all tax benefits that they would normally have.
Has all of this given you a headache? Well, there is a less stressful option available – umbrella companies. Not only do they take a lot of the worry out of contracting, but they take IR35 – public or private sector – out of the equation. That’s exactly why umbrella companies are being seen as a favourable choice for contractors across both sectors.
When working for an umbrella company, you retain all of the freedom of a self-employed person. But, at the same time you will still be paying tax and, in the eyes of HMRC, are an employee – meaning IR35 doesn’t apply to you.
It’s important to recognise that a lot of umbrella companies at the moment are marketing themselves as ‘IR35 compliant’. Given the above, this doesn’t really make sense – as IR35 doesn’t apply to them or their employees. All umbrella companies tax the same way. The only points they can compete on are how much they charge for their services and the perks they offer.
