Public Sector IR35: Panicking Underway

Hot on the heels of recently leaked memos obtained by the Professional Contractors Group (PCG), comes, what the organisation says appears to be, the final guidance from the Treasury as to how Government departments should monitor the new rules for engaging contractors in the public sector.

The document states that where a worker is engaged through their own personal service company and not being subjected to PAYE, they will be required to provide evidence to assure the relevant department that their income tax and NIC's obligations are being met by way of one of the following:

Low risk IR35

To demonstrate that their PSC is at low risk of a HMRC IR35 compliance review by virtue of the business entity tests published by the Revenue in May of this year. This will be required at the six month point of the contract.

Medium/high risk IR35

Again, by reference to the business entity tests, if a contractor is medium or high risk then they will be required to provide alternative evidence. The guidance suggests that this could be a contract review carried out by HMRC's IR35 helpline. As with the low risk category, this evidence would have to be provided at the six month point of the contract.

It is not yet clear as to whether a full contract review carried out by IR35 experts independent of HMRC would be acceptable. This would be a more reasonable approach as contractors should have the freedom to seek advice from someone other than the Revenue who they would naturally eye with suspicion anyhow. Furthermore, HMRC may not have the resources to turn around a contract review within 20 days, which is the time period prescribed for providing all assurances

Within IR35

Where the intermediaries legislation applies to the contract the freelancer will need to provide evidence that they are operating IR35 on the payments being received.

The document also advises that should a department no be satisfied with information provided by a contractor then they can refer the matter to HMRC. This could give rise to an increase in IR35 enquiries as departments running scared of a potential fine of up to five times the salary in question for failing to apply the new rules, may be more likely to defer cases to the Revenue so as to be absolutely certain of their position.

Government departments have wasted no time in issuing guidance to employment businesses ahead of implementation of the new rules on the 15^th September although the PCG says that there is no uniformity across the public sector in the way they are applied. The Department of Business, Innovation and Skills (BIS) seem to be adhering strictly to the guidelines that the rules only apply to those earning at a rate of over £220 per day and engaged for over 6 months, whereas the Department of Health are taking a universal approach and bringing all 'off-payroll' appointees within the rules.

Contractor Weekly has seen guidance recently issued by The Insolvency Service, an executive agency of BIS, to employment businesses which gives further detail on certain types of evidence to be produced and procedures as follows:

Working through a limited company or other body operating PAYE on their whole salary

Where an individual who is not an employee of the department but working through a limited company or other organisation and is suffering PAYE and NIC's deductions on their entire remuneration, then payslips will have to be provided as evidence that such deductions are being made.

Low risk

A worker who demonstrates that they are a low risk candidate, as above, will be regarded as remaining low risk for the duration of the contract provided the terms of the engagement remain the same.

Within the scope of IR35

Here the contractor will be required to produce the deemed payment calculation but as this may only be available at the end of the tax year, then the individual will need to assure The Insolvency Service that it is their intention to perform the calculation and commit to this at an agreed later date.  

The document goes on to say that the new rules will be embedded into all new contracts and contract extensions which is in line with the policy proposals contained within the Treasury's 'Review of the tax arrangements of public sector appointees' published in May of this year. That same document also stressed the need to avoid “the imposition of significant burdens on small businesses….” That statement appears to be lip service as the Government is more concerned with appeasing misguided and misinformed political, media and public opinion regarding tax avoidance.