Public Sector – Will agencies make blanket status decisions?

Q. With regards to the new Public Sector IR35 rules confirmed as proceeding next year, there is a very important question that I haven’t seen asked yet which could have severe implications to both contractors and the Public Sector services. Where a contractor is currently deemed to be outside of IR35, both in terms of what is written in their contract, and also their working practices, they will most likely be working as a Ltd company outside of IR35. However, I am getting the impression that some service providers to Public Sector organizations are leaning towards a blanket decision in putting most if not all of their contractors inside IR35 to take away any administrative burden, and to also avoid any legal challenges of a contractors status.

Can you advise if HMRC will deem a contractors IR35 status decided upon next year to be applied retrospectively, if they are currently working outside IR35, and are soon to be considered inside by their client.

This has massive implications, as it could mean that such contractors have no choice but to leave their current Public Sector contracts to avoid leaving them vulnerable to backdated tax. My opinion is that the possible implications to Public Sector bodies could leave them with a massive shortage in skills.

I think this is an extremely important question that all contractors should be aware of to make plans prior to next April.

A. It is a very good and, as you suggest, important question.

I think the answer can be broken into two parts: the technicality and the practicality.

Technically HMRC could open up retrospective enquiries under the ‘old’ IR35 rules and, technically, they could use a changed post April 2017 IR35 status to do so. Your concerns are therefore understandable.

However, let’s consider the practicality. Firstly, the IR35 tests themselves will not change: if a contractor is confident in their status now and has had it backed up with an independent review they should have every chance of successfully defending their position. You won’t be automatically caught by IR35 if your agency takes the risk averse (and unfair) route of putting all contractors inside IR35.

Secondly, a key rationale for HMRC changing the IR35 rules is to reduce their workload. Their priority is to address the future rather than embroiling themselves in lengthy battles based on potentially borderline, retrospective cases.

I therefore think it is highly unlikely that we will see many examples of this scenario playing out next year and I don’t think it is necessary for contractors to terminate existing engagements. Having said that, contractors should be using the time before April to ensure they have compiled as much evidence and taken as much due diligence as possible in advance of the new rules.

This answer was provided by Qdos Contractor.


  • Andy says:

    All my contracts have included a clause to the effect that neither party is deemed to be an employee of the other. Will this proposed change to Public sector working require contracts that run over this period to be terminated. Would this change of employee status be deemed to be a breach of the contracted terms?

    • Seb Maley says:

      Public sector contractors working inside IR35 post April 17 won’t actually become employees of their agency. You would still have a business-to-business agreement between your limited company and the agency, and you wouldn’t get any employment rights. Nothing will change from an employment law perspective and agencies will want to ensure it stays that way.

      The closest parallel we currently have is probably with the CIS scheme, where subcontractors have tax deducted at source but maintain self-employed status.

  • Griff says:

    I asked this very question to HMRC during their consultation period. Those making the declaration on behalf of the agencies will have never met me, and have no clue how I work, but are likely to go for the ‘safe option’. I don’t trust the agency to tell the time of day, let alone asses complexity like this. HMRC replied last week thanking me for my input, but completely ignored this, with no safeguards. My solution has been to talk direct with the end client and agree a new kind of contract where I supply blocks of fixed rate work (I do x, you pay me y), and have cut out the middle man. Not only does this make it very clear that I am outside of IR35, but also saves the client a fortune in agency fees. I encourage all true contractors to do the same (as apposed to perma-lancers). More fool the agencies who didn’t lobby the government themselves, instead sitting on their fat behinds counting their cash while providing no service.

    • The Q says:

      >My solution has been to talk direct with the end client
      >and agree a new kind of contract where I supply blocks >of fixed rate work (I do x, you pay me y), and have cut >out the middle man. Not only does this make it very >clear that I am outside of IR35, but also saves the client >a fortune in agency fees. I encourage all true contractors >to do the same (as apposed to perma-lancers).

      Sure. When :

      – you and the client are outside the restraint periods of the agency for dealing direct (the periods may not be symmetric – do you know what it is for the client/agency contract etc)

      – the client is allowed to do B2B with contractors (some large clients are procedurally not permitted to do so)

      – the client has the intelligence/will to be able to divide the work items up precisely enough to allow fixed price deliverables to be defined.

      [ Written as someone who has been doing what you recommend (where/when possible) , since the day IR35 became law in 2000. ]

  • Ravi Sthankiya says:

    Who knows how the industry will adapt to the new changes, there has been too much abuse with contractors in sectors like the NHS, ie people leaving thier permie posts, getting a ‘fat’ redunancy pay out, then coming back as a ‘contractor’ etc. True Contractors may even be better off, working outside IR35 in addition to day rates going up.

  • Ying Tong says:

    Agencies take a commercial position in any dispute, regardless of contract terms. Based on that undisguised self interest I would expect agencies to take the course of least risk to themselves in any status assessment.

    Whether that has the effect of seriously restricting the labour supply to the public sector remains to be seen. But it could. Earlier this week I had a call from an agency about a contract role in the North-east. When I learned it was public sector (NHS) I withdrew my interest. I’m taking the course of least risk too…

  • Sibur says:

    QDos Contractor says “You won’t be automatically caught by IR35 if your agency takes the risk averse (and unfair) route of putting all contractors inside IR35” – can you explain that because it makes no sense to me that if the agency deem you inside IR35 they will be collecting tax on behalf of HMRC – so how is it that you won’t be caught? You plainly WILL be caught if the agency deem all contracts to be in IR35 – that’s is the whole point of the new edict – is it not?

    • F says:

      Perhaps I can help you with this.

      The words you quoted were in the context of “will you be caught on your OTHER (i.e. previous) contracts” if your (current) agency puts you inside IR35.

      Obviously, as you say, the current contract would be inside.

  • The Q says:

    The “blanket status” decision will be that you state sector contractors are disguised employees, as the agencies know that is how most clients see you in reality (a “bum on seat” resource but without the employment law rights) . 🙂

    Employment law needs a massive shake-up to put agencies in their rightful place in the arrangement, rather than the current opacity they cause by being an intermediary.

    And of course disguised employee = disguised EMPLOYER (for client tax/employee obligations) .

  • F says:

    Normally Qdos are pretty good, but I’m not very impressed with the answer above.

    1. It ducks half of the question: “Are agencies likely to make blanket status determinations?”. This is a new wrinkle and wasn’t addressed. So we can conclude that they don’t know.

    2. There seems to be a suggestion that contractors should think it’s ok to just stay with “their agency” if they are sudden thrown inside IR35…

    Terrible suggestion!

    (a) Why would you? The tax situation suddenly changes in a horrible way and there are implications to it, I’m surprised to hear some one say that you work on an outside-IR35 basis until someone notices that… oh, hang on… you’re not, you’re inside. The implication is that you got it wrong so that can be true of other contracts as well.

    (b) The idea of ‘your agency’ suggests that Qdos think that contractors have one agency that sends them around the world (a very old-style model that used to persist in… the 1970s or so?).

    The simple fact is that most people will up-sticks and get out of any contract that suddenly shifts status into a different tax regime. And so they should.

    And yes, that will cause a skills shortage in the public sector (i.e. government bodies) and that should cause a re-think.

    While there is some scope for this work out for the best, we all know that HMRC are determined to p
    ut IT/engineering type contractors inside IR35 so don’t expect it to work well for anyone but them.

    The sensible thing for contractors to do is to be prepared to leave with immediate effect. And to respond to any agency contacts for new work with the stipulation that the contract must be outside IR35 and that they must have the contract T&Cs state that any time that changes, they are entitled to terminate with immediate effect.

    That’s the only way agencies will be made to avoid the easy option. As another comment said: I wouldn’t trust an agency to tell the time of day.

  • Biggus Dickus says:

    I normally work in the private sector but an interesting contract came up recently for a company that wasn’t initially obvious as public section. Soon as I found out it was public sector, I withdrew my application.

    Thing is, the scum who run our country are not stupid. There is already a surplus of contract skills available as they’ve allowed half of India and half of EE to come work over here. My prediction is that the quality of the people they can get will fall but they’ll still be able to get people; they just won’t speak English very clearly. Given the quality of managers in the Public Sector I doubt the’ll care. The work will still get done, just even worse than it is now.

  • Willendure says:

    “a key rationale for HMRC changing the IR35 rules is to reduce their workload”

    But they could reduce their workload by using the new inside IR35 status to back-tax the contract. In the sense that it provides a simple and straightforward excuse for them to do it, it will be less work for them to do so.

    I am ending my public sector contract in March, to be on the safe side.

    • dale says:

      Already left public sector, kept in good books of the large consultancy thats doing most of the work. When they need me theyll call i get non IR35 work at a good rate they get their % on top we all win except the govt dept that shells out more than they need to for the same skills and domain knowledge. Oh and the poor tax payer who this is all supposex to help. Problem is HMRC just wants more tax to make them look good no matter if other govt depts spend even more. Bit of a joke really.

  • Andy says:

    IR35 insurance?

    I assume IR 35 insurance for individual contractors in public sector is a thing of the past come April?

  • WKD says:

    I would not make any speculation until the legislation is published. Then let the mess ensue! Taking the least risk path will be on every contractors mind and there are enough Ltd company Public Sector workers to make a difference. Also if you think that HMRC will not collect retrospective tax, then think again…..personal experience says they will, so depending on you longevity (knowing that if you are worth your salt they keep you) then terminating and moving on may be the lowest risk. Confidence Comrades, hold the line to see what the muppets will do next

  • Robin says:

    At the moment it seems like the blind leading the blind. The MoD take on the ‘Autumn Statement’ “From April 2017, the responsibility of operating off-payroll personnel and ensuring they are paying the correct amount of tax will fall to the MoD.” With all this uncertinty there can only be one repsone ‘walk away’

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