Public sector IR35 changes -- quick overview

Exclusively for ContractorUK, IPSE deputy policy director Andy Chamberlain answers the most frequently asked questions about April 2017’s public sector IR35 reforms, known as the 'off-payroll' rules.

What will the reforms to IR35 legislation entail?

At Autumn Statement 2016, the chancellor confirmed that, in the public sector only, IR35 status will be determined by the client, not the contractor.

If a client decides IR35 does apply, the contractor business will be taxed at source, through the Real Time Information (RTI) system, exactly as if it were an employee.

Although contractors impacted by this measure may have to pay tax like an employee, their employment status will not change, so they will not receive the rights and benefits that go with employment such as pension contributions, holiday pay and unfair dismissal rights.

When will these changes take place?

The changes will take effect from 6th April 2017.

Is it the public sector client or the agency that will determine IR35 status?

The draft legislation puts the burden of responsibility on the entity that pays the contractor. Very often this will be an agency. However, agencies are unlikely to have sufficient information about the working practices so they will ask the client to give an opinion on IR35 status. The client is statutorily obliged to provide an answer within 31 days.

Will the legislation be altered down the line?

It has been suggested that the legislation could be changed to make the client liable for the decision, even if the payment is being made by the agency. We will have to wait to until the final legislation is published to know where the liability will rest.

How will this affect new engagements, after 6th April 2017?

We believe that because IR35 rules are so complex, clients will not be able to tell for certain whether the engagement is inside IR35. Because clients or agencies will become liable if they make the wrong determination, they are more likely to take a risk-averse approach and decide to apply IR35 if there is any doubt whatsoever -- and there is usually an element of doubt.

Along with many other business groups, we made these points to the government many times during the consultation process, but to our disappointment, they were ignored.

Could public sector limited companies be taxed retrospectively?

HMRC has not ruled out investigating public sector contractors retrospectively. We did request that HMRC declare an amnesty on contracts which transit to the new tax arrangements in April. Unfortunately, this request was refused.

Is there anything contractors in public sector can do to protect themselves against a retrospective investigation?

We strongly recommend that, if you want to continue with a public sector client even after it has decided your engagement is inside IR35, you arrange for a completely new, properly worded contract to be in force from 6th April 2017. Not merely an extension of your current contract or a side-letter changing the current contract. 
 

Will clients bother with an IR35 assessment?

Public sector organisations are supposed to undertake an assessment of a contractor's IR35 status to determine the tax treatment of payments. We have two main concerns with this; firstly, we have little faith that public sector bodies will be able to make an accurate determination of a contractor's IR35 status, because the rules are so complex and rely on in-depth knowledge of case law, individual contracts and working practices. 

Secondly, evidence is already emerging that some public sector clients are unwilling or unable to make this assessment for each of their engagements. Instead they will simply force all contractors onto the RTI system and effectively put them onto the payroll, without properly considering whether this is the right arrangement or whether it reflects reality.

How can I avoid being caught out now by these new tax rules?

If you are a contractor working with public sector clients, and invoicing on 30-day payment terms, you should send your invoices before 6th March 2017 or run the risk of falling foul of the new tax rules. 

Is the soon-to-be launched IR35 digital tool (the ESS) any good?  

The tool is essentially a series of questions, which when completed gives a determination of whether an engagement is inside or outside IR35. A public beta test is due to go live on 20th February.

Thousands of engagements will need to be assessed by this tool by the end of February, so that contractors, clients and agencies can go to work in March knowing how to treat payment for that work which will be made in April, after the new rules kick in.

What does the future hold?

There is still much we don’t yet know about how the new legislation will work in practice. The real extent of the difficulties it will cause will not become apparent until the middle of 2017.

However we are aware that these rules are already driving contractors out of the public sector and removing the specialist skills and expertise that they supply, and we continue to put our case to government and civil service officials at the very highest levels.

Editor's Note: Related --

ContractorUK Forum: Public Sector IR35

HMRC publishes public sector IR35 guidance set

Contractors' IR35 status to rest with public clients

Government approves IR35 changes from April