IR35 and Public Sector Workers
‘IR35’ was originally introduced in April 2000. As most readers will be aware it refers to the legislation which prevents individuals from providing their services via an ‘intermediary’, such as a personal service company, and paying less tax and national insurance than if they were employed directly by the end customer.
HMRC has introduced new measures from 6 April 2017 for those working in the public sector in order to tighten up these procedures. Although the new measures have made no changes to the conditions that determine when IR35 applies, they have shifted the responsibility of deciding whether IR35 applies from the individual’s personal service company to the public sector body they are working for. Where the rules apply those individuals working in the public sector through an intermediary will pay PAYE and NIC in similar way to employees.
The changes will affect the following:
- Public authorities who hire off-payroll contractors,
- Public sector tax managers, payroll managers, human resources managers and procurement managers,
- Agencies and third parties who supply contractors to the public sector,
- Contractors who provide their services to a public authority through an intermediary.
A key point in the change in the IR35 legislation is the classification of a public sector body. The scope of organisations included within this classification is much wider than just government departments and civil bodies. For the purposes of the new rules a public authority will include the many companies owned or controlled by the public sector, universities, NHS, fire service, schools, the BBC, local authorities and even parish councils, as well as those commonly thought of as government departments.
Due to the serious consequences for organisations that fail to apply the new regulations correctly some are known to be adopting a cautious approach to dealing with personal service companies. They are either refusing to deal with contractors operating through a personal service company, or are applying IR35 in all cases to be safe. This could of course lead to individuals having tax and NIC incorrectly deducted from their payments.
Equally some individuals may seek to avoid working for pubic sector bodies and instead switch to the private sector where the IR35 rules are unchanged for the time being. This may create issues of skills shortage in the public sector, or additional costs if those bodies have to pay more to contractors to compensate them for the additional tax and NIC being suffered.
Determining IR35 status is not a straightforward process, although HMRC have offered a solution in the form of a new online tool which can be used to determine their view of the employment status of a worker. HMRC have stated they will stand by the result of the online tool unless a compliance check finds the information used to arrive at the opinion is incorrect. The tool is designed to be used by contractors, employers and agents, but ultimately it is for the public authority to decided whether off-payroll working rules should apply or not. The Employment Status Service tool can be found at www.gov.uk/guidance/check-employment-status-for-tax.
It is likely that contracts with a public sector body will need to be carefully reviewed, or alternatively those falling within IR35 may cease to use a personal service company altogether and instead seek employment directly with the body in order to obtain the same rights as other employees.
A further point to note is that the 5% deduction previously allowed to those falling under IR35 to cover expenses and additional costs incurred in running a business, will no longer apply to public authority contracts.
The application of IR35 has been complex since its introduction in April 2000, and continues to remain so. If you would like more information on how the legislation applies, or how the new rules may affect you, please contact our Tax Director, Jenny Marks.
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