HMRC has revealed that it will be public sector bodies themselves, not recruitment agencies, which will be responsible for operating IR35 from April 2017 onwards. So, how will this impact contractors?
On December 5th, HMRC released draft legislation and a technical note, Off-payroll working in the public sector: reform of the intermediaries legislation, which details how IR35 will be applied to public sector bodies in April 2017.
In a surprise move, the documents reveal that end-clients (not recruitment agents) will be responsible for determining the IR35 status of contractors… even when an agency is involved in the chain (as they often are).
We asked Seb Maley, director of Qdos, how this change in the way IR35 is to be operated will affect the industry.
What has actually changed?
Up until the 5th December, the general belief was that agencies would be responsible and liable for IR35 in the public sector. The shift to the public sector body, therefore, came as a major surprise to many in the industry, although it is clearly something that was planned well in advance by HMRC. The draft legislation stipulates that the public sector body will be responsible for determining whether a worker is inside or outside IR35. They will then advise the agency (if there is one) accordingly, who will deduct PAYE and NI if the worker is deemed inside IR35.
How will this impact contracting in the public sector?
In theory, this shouldn’t change much; the fundamental elements of the planned reform to the rules haven’t changed – it’s just the party administering them that has. However, public sector bodies will almost certainly be more risk-averse than agencies and will be fearful of being caught out or made an example of; there have been numerous instances of press attention into perceived ‘avoidance’ over the last few years.
On the flip side, they will be well aware of the potential ramifications of taking a hardline approach (i.e. forcing everyone inside IR35). Firstly they risk an exodus of contractors who will end up with significantly less money. Secondly, they would face significantly more cost; not only in the time it takes to administer the new process but also in Employer National Insurance which, at 13.8%, is hardly an insignificant additional cost. Whilst Employers NI is technically the agencies responsibility to pay, the cost will obviously be passed down the chain.
What about liabilities?
One large question mark remains around liabilities. Given the public sector body is making the decision when it comes to IR35 status, common sense would suggest that they should be liable if they get it wrong. For instance, if 200 workers were initially deemed outside IR35 by the public sector body but HMRC subsequently decided they should be inside, you would expect the public sector body to be on the hook for the unpaid tax and NICs.
However, there is nothing in the legislation around liabilities and, given the agency will still be the ‘employer’ for tax purposes for those working inside IR35, technically they will be liable for retrospective tax if status is challenged. The legislation is obviously still in draft though, so I wouldn’t be surprised if this is adjusted prior to 6th April.