HMRC’s plans to change how IR35 legislation is engaged with the public sector have been announced on Thursday, earlier than expected. The changes will affect the way IR35 works for public sector engagements, and if successful, HMRC plans for them to come into force from April 2017.

The decision for these changes to be implemented is currently being appealed by IPSE, and if you’re a contractor working in the public sector, you will soon see why.

What’s the proposal?

The documents of consultation put forward by HMRC propose to change the way public sector engagements are handled. Currently, liability stands with the worker’s company when determining the status of employment and determining if the contract is inside IR35.

However, the changes plan to transfer this liability to the public sector organisation or the agency. They will instead be responsible for determining status of engagement and, if caught, applying the taxes to employees. This paragraph from page six of HMRC’s consultation explains in more detail:

‘This means that where an individual provides services to a public sector engager through a PSC and is doing a similar job in a similar manner to an employee, both they and their engager will be required to pay broadly the same tax and National Insurance as if they were an employee. This will be the case whether the individual is engaged directly or through a third party such as a recruitment agency. Taxes will be reported through the Real Time Information system, and paid using HMRC’s accounting procedures which public sector organisations and agencies will already be using for any individuals they employ directly’.

How could it affect contractors?

The transference of liability from the worker’s company to the public sector organisation or the agency may create a few issues, which are what IPSE hopes to appeal.

The changes would only apply to the public sector, as HMRC made it clear that the private sector will remain unchanged. However, there is the possibility that if the changes are successfully brought into the public sector, the government could apply it to the private sector, although HMRC have not commented on this possibility.

This is likely to act as a deterrent for independent contractors hoping to work in the public sector, and will discourage the public sector and agencies from employing contractors.

What’s included in public sector?

Any organisation that is legally required to respond to Freedom of Information (FOI) requests is considered to be within the public sector. All the following companies are included in the public sector:

• NHS
• Government departments, executive agencies and non-departmental public bodies
• Police and fire authorities
• Local authorities
• Devolved administrations
• Educational establishments including universities
• BBC, Channel 4
• Bank of England

How will IR35 be determined?

IR35 will continue to be determined by the same factors as it has been previously. These include supervision, direction and control (SDC), substitution and mutuality of obligation (MOO).

The only changing factor, for the public sector alone, is that the liability for determining if IR35 applies will be changing from the contractor to the public sector organisation or the agency.

If you need more information about IR35, you can download our guide here.

When will the proposed changes happen?

If successful, the changes will appear in the Autumn Statement and will be implemented in April 2017.

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About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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