IR35 in the public sector: what you need to know

By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community) and Philip McNeill (ICAS Head of Taxation Tax Practice and Small Business Taxes)

6 April 2017

From April 2017, new rules apply for workers in the public sector where the supply chain includes an intermediary.  The prime target is individuals working through a personal service company (PSC).

What it means for you

Hirers, payroll staff, agencies and workers all have new responsibilities.  It will affect you if you have PSC clients with public sector contracts, or advise or operate payroll on behalf of agencies or public sector bodies.

From April 2017, the responsibility to decide if IR35 rules apply in public sector engagements passes from the PSC worker to the hirer.

There are new obligations to share information and make payroll deductions, together with a new employment status online tool.

Scope and timeframe

The new rules don’t just apply to new contracts: both existing contracts covering work after 5 April 2017 and payments made for work arranged before 6 April, but made after 5 April 2017, are caught.

The changes affect how payroll operates and is applied, how payments are made to workers by hirers, agencies and their own PSC.  The context of Corporation tax and Income Tax self assessment returns for PSCs and their directors also changes.

The scope is wider than might be thought at first glance. Public sector means a ‘Public Authority’ as defined in Freedom of Information Act 2000/Freedom of Information (Scotland) Act 2002.  This definition includes wholly owned subsidiaries of public bodies, such as Local Authorities, and can cover University spin-off companies.

Technical guidance on the changes is available.

Health or revenue

Consider the Soft Drinks tax.  More tax yield means lower public health.  Low tax yield means fewer sweet drinks and better health.  If the primary aim is improved health, then changed behaviour is the target, rather than increased revenue.

IR35 public sector rules, though aimed at revenue raising, are also intended to change behaviour. Different parts of the market are responding in different ways.  Caution on behalf of hirers can lead to a default to employee status, but the additional obligations of being an employer means this can be restricted to key workers.  Yet are most PSC contractors not likely to be key workers?

There is yet no clear pattern – and as such, addressing the underlying issues head on may be preferable to avoiding engagement with the new system until a pattern emerges.

Practical consideration

A significant administrative change is that the results of the HMRC employment status checker are now binding on HMRC, subject to an important caveat:

HMRC will ‘stand by the result given unless a compliance check finds the information provided isn’t accurate’; and will dismiss the result only where there is a blatant attempt to fix the result – ‘contrived arrangements designed to get a particular outcome’ will not be accepted.

Simplicity, rather than complex solutions, is likely to produce the most cost effective answers.  Falling within the new rules will produce computations of alarming complexity; but there are more straightforward alternatives: employment, self employment and clear worker’s contracts.

There is significant ambiguity over liability for employer’s National Insurance where a contract falls within the new IR 35 public sector rules.  The outcome appears to depend on the bargaining strength of the respective parties.  High profile, ‘irreplaceable’ workers being more likely to pass on any additional costs to the deemed employer.

Effective contracts, which accurately reflect working arrangements, with due attention paid to the 'badges of trade', such as substitution clauses with payment by the PSC of replacement workers supply, can ensure that independent contractor status is retained. Readers should not forget that mutuality of obligation is still key to considering whether an employment contract exists.

Conclusion

Be decisive.  Clarify contracts and working arrangements.  Ensure that hirers and workers are fully aware of the rules and the status checker.  Public sector bodies will undoubtedly need to accept that they may lose some contractors and retain others via the payroll, and that overall costs are likely to rise as a result of these measures.  Budget constraints may mean that continuity of service is met by fewer people each carrying out more work.  

It is likely that, in time, these measures will be extended beyond the public sector in any case, in an attempt to eradicate IR35 for all but the most robust contracts.

Topics

  • Tax

Previous Page