At the Budget earlier this year it was announced that, from April 2017, the government would make public sector bodies and recruitment agencies responsible for determining whether IR35 applies to an assignment in the public sector. To ensure that new rules are complied with the government proposed that tax should be deducted at source by the paying party (the public sector body or agency). A consultation on the subject was issued and has now closed and, despite opposition from virtually all those that took part in the consultation, there does not appear to be any softening of the government's position. This is because the government believes:
- most PSCs ignore (deliberately or negligently) IR35. In fact, the government estimates only 10% PSCs operate the rules correctly although it is unable to back up this estimate with empirical evidence.
- the IR35 legislation is complicated and time consuming to enforce.
- investigations are rarely able prove conclusively whether or not someone is “genuinely in business.
So, in order to save HMRC the trouble of enforcing the legislation, it is proposed that recruitment agencies and their public sector clients will make the assessments for HMRC, and will be on the hook for the tax if they get it wrong. HMRC has however promised a new digital tool to help the public sector to a decision.
As stated above there has been widespread criticism of this approach, most recently by the UK's Office for Tax Simplification (OTS) which has called on the government to rethink its plans. A full copy of the OTS opinion can be found here but briefly the headlines are:
- the proposals would introduce additional complexity into the tax system. Recruitment agencies and public sector bodies will see their administrative burden increase as opposed to being simplified. Rather than simply find a person to carry out services they will also have to assess the role, the individual's qualifications, and the contracts in order to determine the taxpayer's status.
- the new digital tool may not be easy to use and may not deliver certainty.
- there is no get out for recruitment agencies and public sector bodies even if they have used their best endeavours to come up with the right answer.
It is uncertain whether the OTS opinion will carry sufficient weight with government to initiate a change to the proposals but at present this seems unlikely.
What does this mean for contractors working in the public sector?
The public sector recruiters will want to continue to work with PSCs since many highly skilled contractors work through PSCs. But they will no doubt be nervous about potential liabilities. This may lead to:
- a request for a tax indemnity from the PSC
- a request for an IR35 review from a third party like PayStream
- a refusal to deal with PSCs since the tests are too complicated to implement; in this scenario an umbrella may be an option for that assignment
- a deduction of PAYE and NI before payment is made to the PSC. The difficulty for the public sector body will be how to make the calculation since HMRC are still not decided on how this should work
Are the rules the same for the private sector?
No. And HMRC has said that it does not intend to (at this point) to extend this to the private sector.
When will we know for certain that legislation will be introduced?
There is likely to be an announcement in the Autumn Statement (late November) about the Government's intentions. Even then the final detail will be unlikely to be released immediately. This will not realistically give the public sector or contractors time to adequately prepare before April.