Public sector IR 35-new rules

Contracting in the public sector from April 2017

New rules regarding ‘off-payroll’ workers in the public sector come into force on 6th April. This will affect all contractors working for clients who fall under the Freedom of Information Act, whether direct or through an agency.

Public sector bodies and agencies are now starting to react to the new rules, so what should you do if they talk to you about it?

What are the new rules?

From 6th April 2017 the responsibility for determining the IR35 status of a contract will shift from the contractor to the public sector client. This will affect all contracts, whether they started before or after that date. It specifically applies to payments made on or after 6th April, so will include any prior work delivered but not paid.

If a contract is considered inside (caught) by IR35, the party paying the worker’s company – which will normally be an agency – will have to deduct PAYE and NI before making payment to the PSC.

The agency effectively becomes the employer of the contractor for tax purposes only, but it will not alter the employment status. The contractor will be left with the net payment in their PSC, for which tax credits will apply to avoid double taxation. It is not yet clear exactly how this will work.

Those considered outside IR35 will be able to continue as normal, extracting funds from their PSC as they see fit. The only change will be that the IR35 ‘risk’ will lie with the agency.

What will happen in reality?

This is largely dependent on the reaction of agencies and, more importantly, public sector bodies. Due to continued press exposure of perceived ‘tax avoidance’ in the public sector, there is widespread risk aversion. The default position for many will therefore be to avoid any possible attack or condemnation.

On the other hand, there is a growing realisation that taking a hard-line approach to these new rules will drive many skilled, vital workers out of the public sector. This has already started to happen, with some contractors making early movements into the private sector (where the rules will not change).

With relatively little time before the rules come into force, public sector bodies will currently be considering their options. Those that have taken an early, risk averse stance have faced a fierce backlash from their contractors and that reaction will have been noted by others.

The deduction of tax at source by agencies also presents a complex problem for them, and there is a likelihood that many will push inside-IR35 contractors towards umbrella companies.

What should you do?

If you will be working for a public sector client on or after 6th April you will probably receive communication in the coming weeks. This could come from your agency or from within your client.

Some of you may have received emails already; we know of at least one large body who have begun the process.

Whilst contractors have little direct control over what happens, it is vital that public sector bodies and agencies are fully aware of the impact of any decision they make. The key facts they need to understand are:

  • The determining factors around IR35 have not changed and anyone genuinely operating outside IR35 should be able to continue doing so
  • Forcing contractors inside IR35 will have a major impact on the cost of projects. Not only will the contractor end up with significantly less, but employers National Insurance will also be payable by the agency (who will pass the cost on to the end client)
  • There is no need for a kneejerk reaction to these rules. If the process is carried out fairly and compliantly it will not unfairly penalise genuine contractors, and will ensure those vital resources are retained in the public sector
  • HMRC’s online ‘IR35 tool’ is not mandatory and independent due diligence can be used. The logic behind HMRC’s automated tool will be based on their own interpretation of the IR35 rules which – we know from experience – is not always ‘correct’

For us to collectively influence the behaviour and understanding of those parties involved we need to communicate with – and educate – as many people as possible.

Therefore please feel free to suggest to your agency or end client that they speak to us. We are happy to talk to them either about your engagement specifically, or about the new rules in general.