Public sector contractors face fresh IR35 scrutiny from April 2017

The standout measure announced during Budget 2016 was placing the burden of enforcing IR35 onto public sector bodies themselves and/or recruiters. Here we look at how this proposed change will affect limited company contractors from April 2017 onwards.

In his Budget 2016 speech, the Chancellor announced:

“Public sector organisations will have a new duty to ensure that those working for them pay the correct tax rather than giving a tax advantage to those who choose to contract their work through personal service companies.”

The actual detail (a technical note) was published on Budget Day (16th March) in a document entitled: ‘Payroll working in the public sector: reforming the intermediaries legislation’. You can download it here (pdf).

Here, we’ve summarised why the Government felt the need to tinker with how IR35 is administered once again, and how the proposed new rules are expected to operate from April 2017 onwards.

Why have these proposed new rules been drawn up?

The Government claims that not only are the IR35 rules hard to understand, but that there is ‘widespread non-compliance’, resulting in a need to increase the effectiveness of the current rules. In fact, the Treasury believes that this ‘non-compliance’ is costing £440m per year.

Although the Intermediaries Legislation was specifically created to tackle disguised employment, new rules have been drawn up to ensure that IR35 is applied as intended to contractors who, were it not for the presence of a limited company, would be deemed to be ’employees’ of the public sector organisation.

Importantly, no changes are being considered for use in the private sector, where the existing IR35 rules will continue to operate as they are currently.

Who do the new rules apply to?

The new rules will apply to almost all public sector bodies, including Government departments, local government, the police, NHS, and schools.

The existing off-payroll rules which have been operating for several years in the public sector will be reinforced and extended by this new measure.

Who will assume responsibility for operating IR35?

If the public sector body hires the contractor directly, they will be responsible for operating the new rules and collecting any income tax and National Insurance. And controversially, if (as is often the case), the contractor has been sourced indirectly from a recruitment agency, then the recruiter will assume all of these responsibilities. In the second case, the public sector will remain responsible for ensuring that the agency is operating IR35 correctly.

When a more complex chain of companies exists in the hiring chain, it is the party closest to the contractor’s own limited company which will assume the responsibilities mentioned above.

How will organisations know if a contractor is caught?

Despite woeful attempts to do so in the past, the technical note states that HMRC is going to develop ‘clear, objective tests’ for employers/recruiters to use at the time of hiring, to work out if a contractor is caught by IR35 or not. In less obvious cases, HMRC plans to provide a ‘simple and straightforward digital tool’ to help in the decision-making process.

A sign of things to come?

We asked Seb Maley, Director of IR35 experts Qdos, for his reaction to today’s announcement:

“Unsurprisingly the technical note raises numerous questions, but it’s obviously a fairly significant step – and perhaps gives a strong hint as to the Government’s future ideas for IR35 overall.

“The proposed new rules do appear complex and cumbersome, and the biggest question will be how agencies and public sector bodies will react. The development of an online tool will also be interesting, particularly if the same tests for IR35 remain in place in April 2017.”

Further Information

The associated legislation will be included in the Finance Bill 2017, and will be ‘subject to full consultation’.

You can download the technical note here, which provides further detail on the proposed changes.

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