IR35: It’s coming, if we like it or not

In approximately 10 weeks, new procedures come into effect, changing the way the IR35 status is determined for contractors who operate via their own PSC within the public sector.

The decision for determining if the contractor operates within or outside of IR35 will transfer from the contractor themselves to the public sector body they are engaged with.

What’s the reason for the change?

The government was embarrassed a few years ago when the press revealed that the Chief Executive of the Student Loan Company was being paid through his own limited company. As a result HMRC believe that as it stands, IR35 isn’t working in the public sector. Currently, a contractor’s IR35 status is decided by him or herself.. HMRC are not happy with this arrangement within the public sector and believe that some contractors are classifying themselves as working outside of IR35 in order to pay themselves a salary through their PSC without deducting PAYE. HMRC appear to be ignoring the fact contractors working through their own PSC are paying both Income Tax and Corporation Tax.

By forcing the public sector body to determine a contractor’s IR35 status, they are hoping they will be able to collect more tax revenue through PAYE and NIC.

Is it a welcome change?

Only HMRC see it as a positive step. It has come under fierce criticism from contractors, recruiters and professional bodies representing both contractors and the recruitment industry. Nevertheless, the concerns raised seem to have been pushed to one side and the changes come into effect in April 2017.

Who will it affect?

It will affect any contractor operating via their own PSC and who contracts for a public sector organisation. The term ‘public sector’ itself is extremely broad and includes for example; central government departments, local councils, parliament, NHS, MOD, Police, the BBC and Channel 4.

How will it work?

The public sector body will be held responsible for determining the IR35 status of any off-payroll person they engage with. To make it easier for the organisation to decide this status, HMRC are in the midst of developing an online tool that will help determine if the contractor is inside or outside of IR35.

Firstly, the tool is still being developed, with only 10 weeks left to go and this is a worrying situation. Secondly, the information that the tool gives out will only be as good as the information that is fed into it.

It becomes even more complicated if the contractor is engaged through a third party organisation, such as an agency. In this case, the public sector body is responsible for determining the status and informing the agency of their decision.

If the public sector body fails to do this the agency can write to them asking for their decision. The public sector body then has 31 days to give their response.

The agency’s role is that they are responsible for collecting the appropriate level of tax through PAYE and NIC.

Will it be a failure or a success?

No one knows if it will be a failure or a success, but many are putting money on it being the former.

Contractors who currently operate in the public sector are predicting that they will be forced to find contracts outside of the public sector, and some are already looking for new positions.

If you are a contractor in the public sector and are looking for advice on your tax situation, speak to our team on 020 8952 2234.