IR35 Public Sector Reforms: Draft Legislation

9th December 2016

In the Autumn Statement 2016, the government confirmed that it will reform the intermediaries’ rules (commonly known as IR35) which means that public sector clients will be responsible for compliance in all instances, even where an agency is involved. Furthermore, HMRC’sIR35 status tool (which is still being consulted on) must be used to define IR35 status.

As a reminder, IR35 is a set of rules that affects a contractor’s tax and NICs if they’re contracted to work for a client through an intermediary. The intermediary can be:

  • A limited company
  • A service or personal service company (PSC)
  • A partnership
  • An individual

This week, draft legislation for the Finance Bill 2017 was published outlining the detail of the reform. Entitled  ‘Off-payroll working in the public sector: reform of the Intermediaries legislation,’ this new IR35 guidance from HMRC includes a detailed summary of all the changes and examples of the IR35 reform, along with a set of technical notes and response summaries.

What impact could this have on my agency?

The way you engage with temporary workers in the Public Sector will have to change, as will the relationship with end client hirers. In what could be deemed as a cute move, the decision around the contractors IR35 status has been placed upon the end client, taking the responsibility and liability away from the recruitment agency – this is an unexpected twist.  

Using the new status tool the end client will decide on the temporary workers IR35 status, in line with their contractual obligations and working practises. This presents an opportunity for agencies to have meaningful conversations with their clients and strengthen their relationships. One potential outcome of those discussions is that a number of contractors that are currently operating via a limited company (PSC) will require an alternative e.g. PAYE Solution. It is therefore important that agencies have trusted partners to help manage their temporary workforce and the transition of those that may need to move.

Who’s in scope?

These new rules apply where the services of a worker are provided through an intermediary to a “public authority,” this means a public authority for the purposes of:

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

This covers:

  • Government departments and their executive agencies
  • Companies owned or controlled by the public sector
  • Universities
  • Local authorities
  • Parish councils
  • The National Health Service

And covers England, Scotland Wales and Northern Ireland. Please note that some public bodies in Northern Ireland will be outside the Freedom of Information Act 2000.

Where these new rules apply to an engagement and the public authority contracts with the intermediary, the public authority is then liable to administer PAYE and NICs.

The public sector client must inform the intermediary, agency or third party with whom they have a contract to provide the services with of whether the contract falls within the new off-payroll rules or not. This decision can then be included in the contract with the intermediary, agency, or other third party, or separately.

Our thoughts

Walker Smith understands that this reform could have a significant effect on public sector workers and could change the way in which public sector bodies engage with the contract sector.

Since we were established in 2014, we have been talking to our clients about the management of their temporary workforce’s in line with employment status and this new legislative change further reinforces the notion that HMRC are focused on closing  ‘tax relief’ opportunities for contract workers. We are focused on creating operational efficiency for our agency partners and have developed a range of products, including our Contractor Employment + model which offers lots of additional benefits that aren’t available on agency payroll. We’d be keen to get your views on these recent changes and discuss how you perceive them, please call Mike Lee on 07765 868 739 to discuss the specific circumstances for your business.

We will continue to monitor the development and be in touch with you shortly with more updates.