Reforms to IR35 and the public sector
Lizzie Stone and Ben Watson examine the latest developments in relation to the intermediaries rules and the public sector.
A key issue that came out of the spring 2016 budget was that the government would reform the intermediaries rules for 'off-payroll' engagements of workers who operate through an intermediary in the public sector. This includes engagements through third parties such as employment agencies, outsourcing companies and consultancy firms who supply workers.
The government consulted on its proposals in the summer and the announcement in the Autumn Statement that these new rules will be introduced is as expected. We are now awaiting further detail on the proposal including feedback from that consultation process and draft legislation. This is expected to be available from 5 December.
What is IR35?
The intermediaries rules, also known as IR35, were introduced in 2000 to ensure that individuals who work off-payroll through their own company (or other intermediary as defined in legislation), who would have been taxed as employees had they been paid directly, pay employment taxes on their income. Under these rules the limited company is required to assess whether IR35 applies and, if it does, account for income tax and national insurance on the payments that it receives for the engagement.
The rationale for change?
The government has estimated that only one in ten PSCs who should be operating the rules on at least part of their income are doing so. They believe that public sector bodies should be doing more to ensure that those who work for them off-payroll pay the right amount of tax.
What do we know?
Based on what has been announced and from the consultation, we know that from April 2017 where workers are engaged through their own limited company (or other intermediary as defined in legislation), responsibility to apply the intermediaries rule will fall to the public sector body, agency or other third party paying the worker's company.
Organisations will therefore need to assess:
- Whether they are responsible for applying the intermediaries rules; and
- If they are, whether the engagement is within the scope of the rules.
To assist parties in assessing whether a worker is within scope HMRC has proposed a new simplified process using the current employment status rules. This will be supported by a digital tool to provide upfront certainty.
If any engagement is within scope, then the public sector body, agency or other third party will be liable to account for income tax and National Insurance (both employer and employee) on payments made to the intermediary.
Does it affect my organisation?
The consultation proposes that the definition of public sector set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002 should be used. This covers organisations such as:
- government departments, executive agencies and non-departmental public bodies;
- the NHS;
- police and fire authorities;
- local authorities;
- devolved administrations;
- educational establishments including universities;
- BBC, Channel 4; and
- the Bank of England
Impact
This proposal is a very significant as it changes the long held position that a limited company would need to assess whether IR35 applied and account for tax on fees if it did. That obligation will now be on the public sector body, where it engages and pays the limited company directly, or on third parties that supply, and pay for, the services of worker through a limited company to a public sector body.
If you are potentially caught by these changes you should start preparing for implementation by reviewing pay roll services and engagement protocols to ensure that your systems can cope and comply with the new rules.
Lizzie Stone is a pensions and incentives associate and Ben Watson is head of employee incentives at TLT. Lizzie can be contacted on 0333 006 0479 or This email address is being protected from spambots. You need JavaScript enabled to view it., while Ben can be reached on 0333 006 0376 or This email address is being protected from spambots. You need JavaScript enabled to view it..
