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IR35 changes for public sector
IR35 is anti-avoidance legislation introduced in 2000 and applies where the services of an individual are provided to a client via an intermediary (usually the individual’s personal service company – a PSC) in circumstances where, if it was not for the PSC, the individual would have been an employee (or office-holder) of the client.
The PSC has responsibility for carrying out an IR35 assessment looking at issues such as control, substitution and who provides the equipment and where their assessment is that the individual would have been an employee or office holder of the client, the PSC is required to operate PAYE, and deduct income tax and national insurance (employee’s and employer’s) on the payments it receives from the client as if such payments were payments of employment income. However, in practice, this has not been happening and individuals have been paying significantly less income tax and NI than they would if they were employed.
It has long been recognised by the government that there is widespread non-compliance within the IR35 regime, with the government estimating that only one in ten PSCs who should be operating the rules are actually doing so.
In 2015, the government launched a consultation into the use of personal service companies to avoid paying income tax and national insurance.
With effect from 6 April 2017 the IR35 regime has been reformed for off-payroll engagements of workers who operate through intermediaries in the public sector. The public sector are those organisations named in the Freedom of Information legislation.
The public-sector body itself is responsible for assessing whether IR35 applies. HMRC has produced an online Employment Status Tool [https://www.gov.uk/guidance/check-employment-status-for-tax] (ESS) and a key part of this is the right of substitution. However, HMRC has said that it will not be bound by any decision from the ESS and that the tool is constantly changing.
In the public sector, responsibility for applying the IR35 regime, and accounting for the associated income tax and national insurance liabilities, moves from the intermediary to the public-sector body or, where an agency or other third party is involved in the provision of the worker to the public sector body, the third party closest in the supply chain to the PSC.
So, if a private client provides services to a public-sector body using contractors, and the public sector body determines that those contractors are within the IR35 regime, the private client is responsible for deducting income tax and employee national insurance. However, although the income tax and employee’s national insurance can generally be deducted from the amounts paid to the contractor, the really big problem for existing contracts is that the payer must also pay 13.8% employer national insurance, and cannot pass this on to the contractor as it is against the law to pass on secondary national insurance payments. This can represent a huge dent in profits.
As at 26 April 2017 Network Rail announced that all 120 its off-payroll workforce, from litter pickers to engineers, is outside the IR35 regime. The NHS and HMRC has deemed that all of their contractors are inside IR35. However, contractors do have the right of challenge and many have successfully challenged a ‘blanket’ assessment.