Back to Brookson blog

Potential changes to IR35 in the Public Sector

As you may be aware from our Budget summary (16th March 2016) the Government are consulting on reforming the IR35 legislation to improve its effectiveness in the public sector.  The consultation on this subject closed on 18 August (the consultation document can be accessed here). Brookson have been heavily involved in this consultation process and held several meetings with HMRC and HM Treasury as well as other stakeholders such as IPSE, REC, APSCO, CBI and the FCSA to discuss the implications these proposals could have on contractors working in the public sector. I have summarised below our views on what may be changing and who it may affect.

What are the proposals?

HMRC’s consultation document was published on 26 May 2016 and contained several proposals which may impact the way IR35 operates, and consequently the tax position of some limited company contractors. The main thrust of the proposals is to make public sector bodies and recruitment agencies responsible for operating the IR35 legislation that applies to contractors supplying services into the public sector via a limited company (PSC). HMRC are proposing to roll these changes out from 6 April 2017, subject to Ministerial approval based on the feedback they have received during the consultation period. The key proposals are:

  1. To change the way that IR35 operates for contractors running their business via a PSC and providing services to a public sector body. There are no proposals to change the way that IR35 operates in the private sector.
  2. Where the end client is a public sector organisation, it is proposed that the responsibility for determining the IR35 position and deducting the associated employment taxes shifts from the PSC to the end client.
  3. Where the engagement with the public sector organisation is made through a third party such as an employment agency, it is proposed that the responsibility for determining the IR35 position and deducting the associated employment taxes will lie with that third party.
  4. HMRC are developing an online tool to assist the public sector body / agency to assess IR35 status.
  5. The way in which IR35 is assessed will remain as it is now i.e. on an assignment by assignment basis based on existing case law, but the responsibility for making the assessment moves from the contractor to the engager.

How is the public sector defined for IR35?

Whether you could be impacted or not by these proposals depends on who your end client is. As noted above, if you are providing services to the private sector there will be no changes for you to be concerned about. However, if you are providing services to a public sector end client or are considering entering into a contract to do so between now and 6 April 2017, then from 6 April 2017 you may be impacted (depending on whether or not the proposals are implemented or not). It is therefore, important to distinguish between the public sector and the private sector.

The Government intends to use the definition of “public sector” set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2006. This list covers organisations such as (and this is by no means an exhaustive list):

  • Central Government departments (such as the Ministry of Defence and the Department of Transport),
  • NHS Trusts and Health boards,
  • Local authorities / local councils
  • Devolved administrations
  • Educational establishments
  • BBC, Channel 4 and
  • Transport for London.

At this stage, the definition is not intended to cover private companies who carry out public functions for the state, such as a private healthcare company running an urgent care centre at an NHS hospital.

How will contractors working in the public sector be impacted?

Should the current proposals be enacted, then from 6 April 2017 all public sector bodies or recruitment agencies supplying contractors into the public sector (“the engager”) will be responsible for assessing the IR35 status of contractors supplying services to them via a PSC. If the engager concludes that the contractor is not subject to IR35 then they will make payment gross, as they do now. If the engager deems the contractor to fail IR35 then they will deduct tax, employers and employees NIC from the payment which is made to the PSC under the “deemed payment” calculation.

Should the proposals go ahead, the potential implications for contractors supplying services into the public sector are:

  1. They are no longer responsible for assessing their IR35 position and paying the correct tax, the engager will now have this responsibility.
  2. They will suffer a cash flow disadvantage in that tax and NIC will be withheld at the point of payment by the engager if they deem IR35 to apply.
  3. HMRC have said there will be an appeals process for contractors who disagree with the decision but we do not have details on how the appeals process may work.
  4. Despite the fact that tax and NIC will be deducted from the payment (similar to an employee) there will be no associated employment rights.
  5. Contractors are still able to operate via a PSC but their take home pay may reduce if the engager believes they are caught by IR35 when prior to 6 April 2017 the assignment was treated as being outside IR35.

What are Brookson doing about this?

We have been working closely with HMRC and other stakeholders to lobby against these IR35-Checkboxchanges. The consultation period has now closed but we will continue our dialogue with HMRC to further lobby against the proposals and try to shape the final outcome to try to reduce the impacts they will have on contractors working in the public sector and more broadly on the flexibility of the labour market.

We are also working to develop services to assist the engager to assess IR35 status and for contractors who may be impacted by these changes to continue to operate via a PSC should the proposals go ahead.

We are however in a period of uncertainty and expect to know more at Autumn Statement 2016. This is when we expect a formal update from HMRC on whether the proposals will proceed and what the final position might be. We will of course, publish an update following the Autumn Statement. We expect this to be towards the end of November / beginning of December.

Summary

The way in which IR35 operates for limited company contractors supplying services to the public sector could change on 6 April 2017. This may result in some of those contractors paying more tax and NIC than they do currently. If you are currently working in the public sector or are considering a contract in the public sector then make sure you look out for a further update from us following the Autumn Statement. The date of the Autumn Statement has not yet been announced but typically this is at the end of November / beginning of December.

If you are a contractor providing services into the private sector you will be unaffected by these changes.

14 Comments

  1. Ali Alsawaf

    Hi, so if I’m reading this right my IR35 status could be determined by my medical agency rather than by yourselves. As a locum consultant with no hidden employee benefits whatsoever, is it safe to assume that the actual application of IR35 status hasn’t changed (that is to say I will still be safe given my complete anonymity at work), only that the designated body responsible for determining its status might change?

    Thank you.

    • Carl Henning

      Hi Ali,

      Yes, you are correct. The same rules are applied to assess IR35 status, but the entity bearing the risk of compliance in relation to public sector work (and therefore the entity responsible for undertaking the compliance assessment) will move from the worker’s company to either the recruitment business or public sector entity (such as the NHS Trust or government department).

      This should result in the same outcome being applied now and in April 2017 providing the tests remain unchanged (as currently expected). To help you plan for these changes, we offer up to date IR35 status assessments upon request.

      • Ali Alsawaf

        Will you continue to offer IR35 reviews if these changes are implemented? Currently unlimited reviews are part of the accountancy package and it would be useful if this continues, regardless of change in legislation.

        Thank you.

        • Carl Henning

          Hi Ali,

          Yes, we will continue to offer IR35 reviews. If these changes are implemented, they will only affect public sector assignments. Private sector assignments are not going to be affected by the changes.

          Thanks.

          • Ali Alsawaf

            Thanks, however I work for the NHS via an agency, so can you confirm if you will continue IR35 reviews, even if this proposed change is implemented? For public sector assignments I mean.

            This service would be useful for us should legislation change so we can contest/appeal any agency decision that we are caught by IR35, however unlikely that might seem at my level work.

            Thank you.

          • Carl Henning

            Hi Ali

            The HMRC Consultation Document referenced an appeal process available to locums/contractors who disagree with the public sector body’s IR35 opinion. As we will continue to offer IR35 Review if/when these proposed changes take effect next April, our IR35 review may support locums/contractors with this appeal process.

            Unfortunately, at this stage, we do not have any details about the appeal process, or whether this will be included in the final proposals offered by HMRC for implementation, but we will keep our customers posted on this.

  2. Gillian

    If end clients ‘choose’ to impose IR35 on their contractors, I sincerely hope they will understand their contractors rates will need to increase to reflect this.

    • Victoria McDonnell

      Hi Gillian,

      This is a fair point if the proposed changes are implemented it will be interesting to see how the market reacts.

      Thanks,

      Victoria

  3. Chris Sanna

    If the agency I contract through with a public sector client, using my limited company, disagree with my IR35 assessment and therefore deduct tax/NI, is the invoiced amount they then pay net of this to my limited company?
    If so, is this taken into account with any salary / dividend I am paid by my limited company so that I don’t pay inc tax / NI again ? Could you give an exapmple with some numbers to emphasise the impact on possible net loss to contractors?
    Also I assume that this means that I can’t claim business expenses (non taxable) in relation to that contract if the agency deems that the contract is subject to IR35. Is that correct?

    Chris

    • Matthew Fryer

      Hi Chris,

      In brief, you are correct in that the amount paid to you by the agency/client in this instance will be net of tax and NICs and therefore can be drawn directly from the company without further tax being deducted. It would be accounted for as salary so that HMRC are clear that tax and NICs have been paid on the full amount. The impact on net take home pay varies depending on levels of turnover, flat rate VAT registration and pension contributions made by the company. Typically, contractors subject to the IR35 “deemed payment” calculation would suffer a reduction in take home pay of around 15%.

      No expenses would be claimable as IR35 has been applied. This is similar to the current position when an assignment is caught within IR35 and a deemed payment calculation is done.

  4. Ian Dvenport

    I am pretty sure this does not apply to me as there is no 3rd Party Agency involved in my current contractual arrangements, however, I would have thought that if a ruling applies to working for a Public Body end client but not to work for a Private body end client, where all other circumstances do not change in the contractual arrangements between the parties, that this would be Discriminatory to any individual working for a Public Body end client and potentially illegal – would this be so? – PS: This proposal could open up the possibility of abuse of the payment process by the 3rd party Agency if strict controls are not put in place.

    • Matthew Fryer

      Hi Ian,

      The rules are intended to apply whether there is a third party agency involved or not. Essentially, if you are contracting into the public sector, the entity which pays your limited company will be responsible for assessing the IR35 position. So, if no agency is involved, it will be the public sector body who will have to make the decision regarding IR35 status and deduct the relevant taxes if they think it applies.

      The point you make regarding discrimination is a point which has been raised in feedback provided to HMRC regarding the unintended consequences of this legislation and may well be illegal. In addition it could pave the way for contractors deemed to be employees for tax purposes making claims for employment rights (holiday pay, sick pay etc.).

  5. Terry Moore

    My daughter works as a sole trader as a music teacher. She works in four different schools and also sub contracts work to 2 other music teachers. She has been thinking of starting up as a limited company but is having second thoughts now. I wonder if this new legislation will affect her?

    • Bethen O'Neal

      Hello Terry,

      From our experience, Limited Company working does not typically suit teachers because of their inability to comply with IR35 due to the way they are “controlled” in their roles. As a result, we see very few Teachers choosing to operate in this way. Feel free to get in touch with our New Business consultants to chat through this further.

      Kind regards,

Leave a Comment