Also known as the ‘intermediaries’ legislation’, IR35 was established to combat those who would normally be treated as a full time employee, but who have chosen to supply their services via a personal service company (PSC).
Operating in this way enables the individual, in the eyes of HMRC, to falsely make substantial tax and National Insurance (NI) savings.
HMRC have significantly increased their compliance in IR35 and with the agency reporting requirements it is now much easier for HMRC to profile companies and target them more effectively.
HMRC are also undertaking a number of consultations on how to improve IR35 compliance including transfer of debt provisions.
It has never been more important to consider and fully address IR35.
Changes to IR35 in the Public Sector from April 2017
The main thing that’s changing on the 6th of April 2017 is that the liability for determining whether IR35 applies is shifting to the public sector body itself, or to the agency engaging the Public Services Company if applicable. In fact, when IR35 was first considered in 1999, this was how it was supposed to work.
Public bodies have really never had to deal with this before and it is a big change that will have an impact on many processes and working practices. Contractors may find the new rules make working for public sector clients less attractive and departments could have to make difficult decisions on how to replace skilled workers who have moved to exclusively private sector work.
Example:
Let’s take the example of an IT contractor working on a crucial NHS project. From April, the NHS decides it’s safest to apply PAYE and National Insurance to the contractor’s pay. Faced with a drop in earnings and no additional employment rights, what would the contractor’s incentive be to continue taking on public sector work?
Of course, the legislation itself is not changing, only the burden of applying it. Theoretically, if a public body or agency determines that IR35 applies, then it should still apply to private sector contractors working under similar conditions. however, the problem is in how accurately and consistently the tests are applied. A “play-it-safe” attitude might protect public bodies from the “stick” end of the legislation, but that wouldn’t make it the correct decision in every case. An HMRC tool is on the way to help agencies and public bodies apply the criteria correctly, but a one-size-fits-all solution hardly seems to reflect the range and complexity of circumstances it’s going to be applied to.
Worse still, there’s going to be very little time for these decisions to be made. All payments to contractors made after the 6th of April will have to be considered under the new rules, regardless of when the contracts they apply to were signed. No time has been allowed for bodies and agencies to consider their positions or plan for the fall-out. The promised calculator tool has yet to materialise, so no one in line to be affected by the changes is in any position to predict or prepare for their outcome.
An important wrinkle in the new system is that, even when there’s an agency standing between the worker’s Limited Company and the public body, the public body still has the responsibility for determining whether or not IR35 applies. Of course, a key consideration is going to be how that implementation will actually work in practice.
Furthermore, not every type of contractor will be treated equally. For instance, special rules, exemptions or provisions are being made for, amongst others Construction Industry Scheme workers, Managed Service Companies and foreign entertainers.
RIFT Legal Services is ideally placed to offer a comprehensive review of how both clients and Limited Companies operate. We can provide detailed information and advice as to which workers are caught by IR35, and ensure full compliance with the law. Our team has a world-class background in IR35 compliance and associated legislation. We also have expertise in handling employment status inspections and defending clients against HMRC challenges.
For more information on IR35 Protection please contact RIFT Legal Services on 01908 516016 or info@riftlegalservices.co.uk