The crux of these changes is that engager – the Public Sector Body or the agent contracted to them – needs to make IR35 status decisions and make IR35 deductions at source
How will IR35 differ in the Public Sector versus Private Sector?
|Non Public Sector Contracts||Public Sector Contracts|
|Responsibility for Status Decisions||PSC||Public Sector Body|
|Responsibility for making deductions on contracts inside IR35||PSC||Person paying the PSC – Agent, or Public Sector Body if no agent|
|Tax and Employees NI borne by||PSC||PSC|
|Employers NI borne by||PSC||Person paying the PSC – Agent, or Public Sector Body if no agent|
|5% expense deduction||Allowed||Not Allowed|
|SSP/SMP and similar||PSC||PSC|
Scope of the New Rules
These new rules apply where the engager – the Public Sector Body – is within the scope of Freedom of Information Act.
Circumstances when the rules apply:
- When a contractor working via a PSC contracts to an Public Sector Body directly or via an agent; and
- The status tests are failed, the responsibility for the test being with the Public Sector Body (on request, if necessary, from the agent)
Circumstances when the rules will not apply:
- A contractor working via PSC is engaged on an outsourced Public Sector project (HMRC give the example of a project manager contracting to a construction company who have a contract to build a hospital wing). However normal IR35 considerations still apply in this relationship
- Contractor works via a Umbrella Company – as tax and NI is deducted under PAYE anyway
Employment Status Tests
The Employment Status Tests themselves haven’t changed – see our guide to Status Tests. The same rules apply inside or outside of the Public Sector
However HMRC have developed a new tool for Public Sector Engagers to use – there are concerns it may not be objective.
This tool was published on 2 March 2017, and can be viewed here on HMRC site
Caught Contracts – In Practice
When a contractor works through a PSC for a Public Sector Body and the contract is deemed inside the rules, then the following happens:
- The agent, or if no agent the Public Sector Body, must treat the ex vat PSC fee as a gross salary amount and deduct tax and NI under PAYE and account via RTI in the name of the contractor personally.
- The agent, or if no agent the Public Sector Body, must also pay employers NI – note this differs from the standard IR35 approach where the contractor would bear this
- The contractor can offset the amount on which tax and NI has been deducted by the agent or Public Sector Body (normally the net invoice) against remuneration from their own company , implying they must draw a salary of a similar level
The 5% general expense allowance that applies generally under IR35 is denied on public sector contracts.
In theory the contractor can deduct via their PSC direct expenses such as eligible travel, and specific deductions PI insurance and pension costs, but its unclear what these are relieved against if all the PSC income is from a public sector contract.
There is no change to how VAT works in these circumstances. It is still charged on top of the invoice by the PSC, received from the agent/engager, and paid over. Deductions for IR35 work on the net after VAT amount.
There is no change to employment rights / employment protections, and no extra rights accrue. No Public Sector pension entitlements accrue.
The PSC is still responsible for SSP, SMP and similar.
HMRC Guidance and Examples
HMRC published a briefing with Budget 2016
HMRC published a technical note in December 2016 which is the main guidance available, with examples
HMRC published summary information in February 2017
Whitefield Case Studies
We’ve prepared some examples on how the changes may impact a hypothetical client with a gross contract rate of £100k
Its clear this new regime will take a while to bed down. Initial observations are:
- A number of Public Sector Bodies are now saying that all contractors must be paid via an Umbrella company – there is some logic in this in that it takes away the need for the engager to operate the new rules, however the headline rate a contractor receives will be lower via an Umbrella due to the Employers NI that needs to be borne, and, of course, full Employees NI and tax will have to be deducted under IR35 with minimal offset for expenses.
- If the agency or Public Sector Body continue to pay your company, but deem the contract inside IR35, then they are bearing the Employers NI – expect a possible downward rate adjustment, or check tax clawback clauses in contracts.
- More long term this may make Public Sector contracts less attractive, with the possibilities of making it difficult for the Public Sector to recruit, moving work towards more expensive consultancies, or push contract rates up in the Public Sector. Its reasonable to ask, at a time of considerable change in and turbulence in Government, whether this has been thought through.
In terms of practical considerations for our clients working in the Public Sector:
- If your contract is deemed caught and you continue to operate via your PSC, then we can certainly accommodate the debits and credits in your tax returns and accounts, and help set the appropriate offsetting salary in your PSC.
- If you decide to take a permanent role, or permanently use an umbrella arrangement instead, then we can assist in closing down your company – our guide is here. (see below re umbrellas, and the possibility of a Whitefield Umbrella)
- If you decide – or are forced – to use an umbrella for the current contract then we can assist in putting your company on hold – again, our guide is here. Our regular fees reduce to 50% after three months of not actively using your own company (again see below regarding Umbrellas, and the possibility of a Whitefield Umbrella)
Finally beware of any offshore solutions which promise to get around the rules, or companies promising to negate the effects of the rules. If something looks too good to be true, it probably is, and many contractors are currently counting the cost of involvement in EBT arrangements and other failed schemes.
In terms of selecting an Umbrella, Whitefield historically have not offered Umbrella Solutions to our clients. However we are looking closely (February 2017) at developing an simple umbrella solution for those being guided this way by a Public Sector Client/Agent – we would intend it to be compliant with all UK legislation and procedures. If this is something of interest, please let us know.
There are other IR35 news stories and comment on our site: see them all here
- Another HMRC IR35 defeat 11/06/2018
- HMRC Private Sector IR35 Reform Open Consultation 18/05/2018
- HMRC lose another IR35 case 18/05/2018
- HMRC loose IR35 case on control 08/05/2018
- Spring Statement 2018 13/03/2018
- First IR35 case in a while – Ackroyd v HMRC 22/02/2018
- New consultation on IR35 rules 27/11/2017
- Employed or self-employed? 15/03/2017
- Spring Budget 2017 – First Impressions 08/03/2017
- HMRC release new Employment Status Indicator Tool 02/03/2017
- Public Sector IR35 changes – Examples 11/02/2017
- Public Sector IR35 changes 07/02/2017
- IR35 Public Sector Reforms and the Autumn Statement 06/12/2016
- IR 35 – big changes for public sector bodies 07/10/2016
- Spring Budget: IR35 – the end of the flexible workforce 18/03/2016
- Spring 2016 Budget and Technical Briefing 16/03/2016
- IR35 changes on hold 17/12/2015
- Autumn Statement 25/11/2015
- Is fundamental reform of IR35 on the horizon? HMRC consultation 03/08/2015
- Budget 2015 18/03/2015
- Scare stories around Intermediary Reporting Rules 06/03/2015
- Taxwise on IR35 10/02/2015
- HMRC IR35 forum minutes 25/09/2014
- HMRC new IR35 guidance 20/06/2014
- Lords Select Committee on PSCs 10/06/2014
- HMRC and Personal Service Obligations (updated) 11/12/2013
- HMRC IR35 stats 11/12/2013
- HMRC and Personal Service Obligations 10/12/2013
- Autumn Statement & IR35 05/12/2013
- Dividend Levels and IR35 Risk 04/12/2013
- PA Holdings – appeal withdrawn 12/04/2013
- HMRC guidance on RTI and IR35 09/04/2013
- IR35 and office holders – Finance Act 2013 04/04/2013
- Budget 2013 20/03/2013
- IR35 Forum Minutes and Employers Bulletin 18/02/2013
- Autumn Statement 05/12/2012
- IR35 and Public Sector Contracts (redux 1) 16/10/2012
- New IR35 business entity guidance on our web site 04/10/2012
- IR35 and Public Sector Contracts 04/10/2012
- IR35 stats 01/10/2012
- New Guidance: Loans between a Company and its Directors / Shareholders 12/09/2012
- Dividend administration guidance 03/09/2012
- IR35 and Personal Liability – can HMRC proceed against an individual? 21/08/2012
- IR35 compliance checks to increase? 14/08/2012
- The P35 question on service companies – revisited 14/08/2012
- Closing down your company: a cautionary tale 09/07/2012
- Service Companies and the P35 question 29/05/2012
- IR35 and Controlling Persons 23/05/2012
- New HMRC IR35 guidance (updated: 10 May 2012 – 14:15) 10/05/2012
- IR35 and the budget 22/03/2012
- Pension capping: 2011-12 revised limits 14/12/2011
- Primary Path 16/08/2011
- LATEST EMPLOYMENT TRIBUNAL RULING 02/08/2011
- Update on a recent IR35 case 11/07/2011
- ECR Consulting: IR35 Hypothetical Contracts 28/06/2011
- IR35 and the Budget 24/03/2011
- Budget / IR35 22/06/2010
- June 2010, "emergency’ budget 22/06/2010
- Key points from Coalition Joint Programme 20/05/2010
- Tories to abolish IR35 09/02/2010
- IR35 Contract Reviews 07/10/2009
- Dragonfly 10/11/2008
- HMRC Service Company Definition 12/09/2008