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:
- 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.
- 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.
- 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.
- HMRC are developing an online tool to assist the public sector body / agency to assess IR35 status.
- 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:
- They are no longer responsible for assessing their IR35 position and paying the correct tax, the engager will now have this responsibility.
- 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.
- 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.
- Despite the fact that tax and NIC will be deducted from the payment (similar to an employee) there will be no associated employment rights.
- 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 changes. 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.
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.