Following the ‘Off-payroll working in the public sector: reform of the intermediaries legislation’ consultation launched back in 26 May, the government has published a summary of responses to the key themes raised by stakeholders, including public sector organisations, agencies and contractors. Accompanying it are technical notes, Tax information and impact notes – and the draft legislation for public sector IR35 reform(PDF) itself.
The criteria for ascertaining IR35 status haven’t changed, and the government reiterated in its summary of responses that the reforms apply to public sector contractors only with no intention to extend them to the private sector. We look at the implications.
IR35 changes to public sector contracting
As part of the Finance Bill 2016 and with effect from April 2017, personal service companies (PSCs) operating in the public sector will no longer be liable for determining IR35 status – the onus of responsibility will fall on public sector clients, even when an agency is involved. If the contractor falls inside IR35, the party who pays the contractor – either the agency or public sector client – will also be responsible for deducting tax and National Income Contributions (NICs) as well as having to pay employer NICs.
One of the key points raised in the consultation was the fear that to avoid risk and compliance issues public sector organisations would adopt a ‘safety first’ approach to avoid incurring any penalties. But for those contractors wrongfully brought inside IR35, respondents argued that this would result in an increase in tax claims and an added administrative burden for public sector organisations. Based on feedback received, the government will also introduce new legislation to penalise contractors who provide false information to bypass the rules, making them liable for tax and NIC if found guilty.
On a more positive note, the government has agreed to do away with gateway tests, first mentioned in the consultation document. The digital tool that is being built with the help of stakeholders is expected to make the process simpler and less open to misinterpretation. These proposals were welcomed although there are concerns about accuracy, despite the government’s best assurances that the tool will be effective in the vast majority of cases.
Lure of the private sector?
It’s a time of uncertainty for public sector contractors and the likelihood is that they will be hit hard financially. The 5% tax-free allowance covering administration and training expenses has been scrapped, and even though compliant contractors can still claim for allowable business expenses, this is another move that will reduce their take home pay and top up government coffers.
On the topic of employment rights for those contractors inside IR35, the government has done a good job of skirting the issue, simply stating that ‘there is no direct link between employment taxes and rights provided by engagers’. And let’s not forget the extra burden of administration and compliance for engagers – some of the smaller agencies, for example, don’t have the payroll systems and controls to deal with the changes.
Clearly there are plenty of guidelines for the government to work on prior to the April 2017 deadline. It has listened and answered many of the concerns from stakeholders. And the message is clear: those genuinely self-employed should not be affected and public sector organisations should still be able to hire contractors in the normal way.
Yes, it’s a nervy time and public sector contractors are rightly feeling targeted and disgruntled. But talk of a mass exodus to the private sector is likely to be unfounded.
This looks very complicated and raises a number of questions:
1 if the contractor has insufficient income to use all his allowances in the tax year, is the tax deducted by the employer from the payments made to the PSC repayable?
2 does the NI deducted from the payments made to the PSC count towards the number of years payments required for state pension?
3 when the PSC pays the contractor, either by salary or dividends, is that only out of net pay received by the PSC? Is the same income taxed twice?
Looks like a can of worms and the HMRC illustrations only deal with the easy bits.
The impact assessments are laughable.
Rubbish. Contractors will leave on mass. They are not stupid and will just migrate to the private sector unless they are idiots and actually want to have their day rate raped by the goverment.
It appears that the governments mission to end contracting is under full swing. I wonder how many agencys like Accencture are pushing this! Because of course no more contractors means lots of work for testing and consultancy agencys doesnt it!
Indeed, the article on this on contractor uk even pointed that out as a positive for business, that consultancies would be exempted.
I am off for sure…
Currently in a Public Sector role. Won’t be come end of March next year, regardless. Far too uncertainty-averse to become an ‘early adopter’ of these new rules and their extremely woolly language that surrounds them.
Could double my rate I suppose, though…? ;o)
As others have said, just like the original IR35 there does seem to be the stench of “big four” consultancies about these proposals.
And of course with a possible exodus from the state sector, then the chance to cry “skills shortage” and try and import as much cheap overseas labour as is possible (in the likely post Leave UK) .
Yes, I could see the headline “skills shortage” as well, which is untrue of course as there are plenty of skills in IR35 Caught sector of the contract market.
So we need to be vocal when these headlines appear.
Perhaps we all need to start advertising: ” IT contractor SME for hire – due to high profit global corporate IT Consultancy inflated rates – arising from UK government/HMRC suppressing UK homegrown low cost high skill set SMEs”.
I thought ‘contractors’ were getting it hard; but it looks like the agencies has been given a poison chalice. In that they need to somehow extract ‘local processes’ from their clients (I have been waiting for 6 months with still no date for when it will be available) together with cranking-up a pay-role system for those contractors found inside IR35. If they adopt the blanket statement that ‘all’ contractors are within IR35, then my daily rate would need to increase by 50% or it will be moving towards the private sector or the dole. There is also chatter that some agencies are considering making the existing contractors ‘associates’ I’m not sure how this would work, or whether it’s legal.
Double your rate, you won’t be claiming mileage or business entertainment or anything else presuambly, never mind being paid differently to some extent.