​IR35 in the Public Sector

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As of 6^th April 2017, the responsibility for determining the IR35 status of an engagement shifted from the contractor to the public sector body, applying to payments made on or after 6^th April, so included any prior work delivered but not paid.

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If a contract is considered inside (caught) by IR35, the party paying the worker’s company (the fee-payer) – which will normally be an agency - will have to deduct PAYE and NI before making payment to the PSC (personal service company).

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The fee-payer effectively becomes the employer of the contractor for tax purposes only, but you remain as a PSC contractor. The contractor is left with the net payment in their PSC for which tax credits will apply to avoid double taxation. Click here for the HMRC guidance of how this will work.

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It is important to remember that those considered outside IR35 will be able to continue as normal, extracting funds from their PSC as they see fit. The only change will be that the IR35 ‘risk’ will lie with the fee-payer/client.

The public sector rules will be extended into the private sector as of 6th April 2021.

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With the extension, we have seen some refinements to the rules which will also apply to the public sector, bringing the rules in line.

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From April 2021, public sector bodies will be required to supply a 'status determination statement' to both the contractor and next party in the supply chain (usually the recruitment agency) who will then be responsible to pass this information on until it reaches the fee-payer (unless they are the fee-payer themselves).

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The statement must include two things:

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1. the status decision made following due care and consideration
2. the reasoning behind this decision

Failure to comply with this will result in the client being considered the fee-payer and therefore liable for any tax deductions.

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 The same is true for the client-led disagreement process which will also be required from April 2021. Clients will be required to respond to any status dispute within 45 days of receipt - including the result of their consideration and the reasoning behind this.

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HMRC have released the Check Employment Status for Tax tool (previously Employment Status Service) to help public sector bodies determine the status of their PSC workers.

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The tool is an online questionnaire which is free and accessible to anyone, but for the use of the tool to hold weight in an enquiry, you will need to submit your details and save a copy.

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The CEST tool is for guidance only, and can give an indeterminate answer (which it does in around 15% of uses). It is also not mandatory, and should not be confused with the ESI tool which was intended for the Construction Industry Scheme.

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There is little trust for the tool in the industry, and it has been noted that some key status tests, including Mutuality of Obligations have been omitted. 

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Click here for more information on CEST

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Whilst contractors have little direct control over what happens, it is vital that public sector bodies and agencies are fully aware of the impact of any decision they make. The key facts they need to understand are:

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• The determining factors around IR35 have not changed and anyone genuinely operating outside IR35 should be able to continue doing so
• Forcing contractors inside IR35 will have a major impact on the cost of projects. Not only will the contractor end up with significantly less, but employers National Insurance will also be payable by the agency (who will pass the cost on to the end client)
• If the process is carried out fairly and compliantly it will not unfairly penalise genuine contractors, and will ensure those vital resources are retained in the public sector
• HMRC’s online ‘IR35 tool’ (ESS) is not mandatory and independent due diligence can be used. The logic behind HMRC’s automated tool will be based on their own interpretation of the IR35 rules which – we know from experience – is not always ‘correct’

First and foremost, establishing a dialogue with your agency/end client is an important step in the right direction. The responsibility is no longer yours, which will take some getting used to. Understanding your agency/end client’s intentions will help you plan your income/contract roles and negate too much uncertainty.

The rules only apply to contracts where the end client is a public sector organisation (those who the Freedom of Information Act applies), including most government departments, universities, the NHS and major broadcasters such as the BBC.

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The new rules do not apply to any contracts in the private sector, even if they are concurrent with a public sector contract and through the same agency until 6th April 2020.

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From 6th April 2020, the rules will apply to all public sector contracts, and all private sector contracts where the client company is considered medium or large according to the Companies Act 2006. Find out more about the private sector changes here.

For any income derived from a public sector contract after April 2017, whether inside or outside of IR35, will not attach any liability for the contractor. This is because the liability has now been passed to the ‘fee-payer’ which is usually the agency, but can be the public sector body if ‘reasonable care’ to determine your status has not been taken or they have failed to meet their obligations.

You will however remain liable for any income derived from a public sector contract prior to 6^th April 2017 and HMRC can still go back up to 6 years. You may therefore wish to maintain your insurance to cover for any potential investigation into prior income, particularly for those who are determined as inside when previously outside, as this may raise questions for HMRC as to why prior income was not taxed as a deemed payment. You will need to assess whether you would like to cover for this risk.

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Any income derived from a contract in the private sector will still remain the liability of the contractor until April 2020.

This is one of the biggest flaws of the rules, in that many contractors will become taxed as employees, however will receive no employment benefits such as a workplace pension or holiday entitlement.

We hope this will change in the future. Matthew Taylor, Chief Executive of the Royal Society of Arts has been tasked with a Review into Modern Employment Practices which noted this inconsistency, however the rules have yet to be aligned.

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We have been working hard with many agencies and end clients since the rules were confirmed to go ahead in the Autumn Statement. We have worked with over 100 agencies/end clients with a pragmatic way of dealing with the new rules.

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We have developed our own online test; the Qdos Status Review. It is an online questionnaire which seeks to understand the nature of your working practices with your current engagement. This ensures that you receive an independent and fair evaluation of your status, and your end client/agency is encouraged to take a fair stance by reducing the administrative burden, and insuring the fee-payer for the consequences.

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• The assessment covers all of the recognised IR35 status tests, based on case law and our two decades’ experience defending cases.
• Unlike HMRC’s CEST tool, each question includes a free text field so you can provide as much context or explanation as you feel necessary, and your responses are assessed by an experienced consultant at Qdos, not by a computer.
• The online portal provides you with complete visibility of all your assessments and their progress.

This is not a product you can purchase on our shop. If your end client/agency has opted to use this service, your end client or agency will send you an invitation to take an assessment through the Qdos Status Review portal.