In May 2016, HMRC launched a consultation to consider the use and application of IR35 in the public sector. IR35 considers the underlying nature of your working relationship with a client. Generally speaking, where you work in the same way as an employee of the client, you should pay broadly the same tax and national insurance contributions (NICs) as that employee.
At the Budget earlier in the year, government announced that from April 2017, the responsibility for operating IR35 when working in the public sector will shift from the individual's PSC to the public sector body, the agency, or the third party paying the PSC, known as the "Engager". If you work in the private sector, IR35 will remain unchanged.
HMRC believes there is widespread non-compliance with IR35 and it is predicted to cost more than £400 million in 2016/2017. In a recent meeting with HMRC, HMRC estimated that 20,000 public sector contractors are not paying the right tax under IR35 rules. In HMRC's words, by putting the public sector right, it will allow them to concentrate their compliance efforts in the private sector.
HMRC are keen to reiterate that IR35 itself is not changing. However, if you are working in the public sector, your Engager will have to work out whether, under IR35, you would have been an employee if engaged directly (inside IR35). If you fall inside IR35, your Engager will then operate tax, employee NIC and employer's NIC as if you were an employee. Tax and Primary NIC will be deducted from the payments made to your company.
To assist Engagers in making a decision on IR35, HMRC are creating a new digital tool. This will involve a series of questions designed to provide a real-time and definitive HMRC view on whether or not IR35 applies. Providing the information given is accurate, the tool will be binding on HMRC and will provide an audit trail on the decision.
The consultation ends on 18th August but conversations will continue to run into September. PayStream will liaise with HMRC to offer our opinion and advice on the new proposed tool. If you are currently working in the public sector, it is business as usual for now. You should continue to take advice on IR35 at the start of every assignment and at regular intervals thereafter.
Our IR35 review service is available to both PayStream and non-PayStream accounting customers.