IR35 in the Public Sector – changes coming April 2017

From April 2017, IR35 status in the public sector will no longer be determined by the contractor but instead by the client (engager). If the public sector client decides that the contractor company is subject to IR35 they will deduct tax from any payment to the contractor and pay this over to HM Revenue & Customs as if they were employees.

What is IR35?

IR35 was introduced as an anti-tax avoidance legislation, designed to stop ‘disguised employment’. Disguised employment works by putting a limited company between what would normally be an employer/employee relationship, thus avoiding the client having to pay holiday pay, sick pay, maternity/paternity pay, etc and enabling the contractor to potentially benefit from a reduced tax bill. If IR35 applies, fees paid to the company are taxed in a similar manner to salary. The tests for whether IR35 applies have never been very clear.

2017 Changes

The fundamental rules applying to IR35 are not changing, but the responsibility for determining whether they apply will shift from the contractor to the public sector end client. If this public sector body decides that IR35 does apply, the contractor business will be taxed at source through real-time information system (RTI) as if they were an employee.

Who will be affected?

These changes will apply to:

  • 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
  • Workers who provide their services to a public authority through an intermediary

A public organisation for this purpose means a public authority subject to the:

  • Freedom of Information Act 2000
  • Freedom of Information (Scotland) Act 2002

It also includes companies owned or controlled by the public sector.

So what does this mean going forward?

One of the fears is that because IR35 rules are so complex, clients will not be able to tell if an engagement is caught and will take a risk-averse approach and apply the tax deduction to all engagements. Contractors will have a right of appeal against a decision and have the ability to reclaim any over deducted tax back.

What should you do?

Review all contracts that you have in the first instance and establish if the client will be classed as a Public Sector Organisation. You will then need to determine how you will be affected by these rules going forward.

HMRC are encouraging public organisations and agencies to use the Employment Status Indicator (ESI) to determine IR35 status. Whilst this does not factually determine employment status, HMRC has made it clear that the result should be implemented.

The HMRC ESI tool can be found here.

For more information or advice on these changes please contact us on 01903 234094.

A version of this blog originally appeared on the website of one of our MHA association member firms, Broomfield Alexander.

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