IR35 in the public sector - a contractor’s guide
Editor's Note: An updated version of this article is available.
Alongside new rules governing ‘off-payroll’ workers in the public sector, the Cabinet Office issued a Procurement Policy Note (PPN) to provide central government departments, state-run bodies and public sector agencies with a guide to help them seek assurance about the tax arrangements of their contractors.
As nothing was issued to assist the contractors – the very workers so much of the public sector depends on, to help them understand either the off-payroll rules or the assurance process, ContractorUK asked a leading industry expert to help fill the gap.
Here, IR35 expert Kate Cottrell, co-founder of employment status specialists Bauer & Cottrell, offers advice to contractors and other off-payroll workers providing services to the state sector who are being asked to provide assurance about their tax affairs.
This affects most contractors where public sector money is at the end of the line, including where agencies and consultancies are in the contractual chain, and it extends to other bodies such as the BBC and the NHS. It definitely affects any contractor earning at a daily rate of £220 or higher, and applies to contracts lasting more than 6 months from August 2012.
What does it mean for me?
Contracts will be changed to include clauses giving the right for engagers to seek assurances and information and evidence to show that income is being treated correctly for tax and NIC purposes and especially with regard to IR35. Those operating through umbrella companies or on agency payrolls will have to provide copies of their payslips. If you’re a contractor, you could risk having your contract terminated if you do not comply with the assurance process and failure to comply could result in the engager informing HM Revenue & Customs.
What do contractors with a Personal Service Company (PSC) have to do?
Step 3 of the guidance in the PPN is the critical part. It states:
Where the worker is engaged through their own limited company (a personal service company) and not withdrawing all their income from the department under PAYE (as set out in step two) they will need to provide evidence of one of the following:
- The worker should be able to show that their service company is low risk for IR35 according to HMRC's “business entity” tests described in HMRC guidance published May 2012 UPDATE - 2014: The Business Entity Tests have been withdrawn (but public sector end-users may still be using them)
This means that they are a low risk of HMRC checking whether they need to operate the IR35 legislation described in step three. The worker will be able to provide this at the 6 month point. Provided the terms of the engagement remain the same, the service company will remain low risk for the duration of the contract.
If the worker is medium or high risk according to HMRC‟s “business entity” tests but feels that they are outside the scope of IR35, then they will need to provide assurance in a different way – for example, following a contract review by HMRC‟s independent IR35 helpline. The worker will be able to provide evidence of a contract review to say that they are outside the scope of the IR35 legislation at the 6 month point. If the terms of the contract remain the same, the assessment of the service company will not change for the duration of the contract
- If the contract is within the scope of IR35, the worker can provide evidence that they are operating the IR35 legislation on the payments received from the Department. This can be evidenced by the worker providing a “deemed calculation”. This is a calculation that requires the worker to consider all the income for the year from a particular contract that is within IR35, make a "deemed payment" to HMRC for employer NICs and pay employee NICs and PAYE on the remainder of the income. The deemed payment calculation can be accessed online at http://www.hmrc.gov.uk/ir35/ir35.xlt. The legislation only requires the individual to make this payment at the end of the tax year, so it will not be possible to provide assurance until this point – the individual will need to indicate that they are intending to do this when assurance is sought and commit to meeting this requirement at an agreed later date.
If the department is not satisfied with the evidence they receive they may send details to their CRM or customer coordinator in HMRC to be considered alongside other intelligence to support HMRC‟s work to tackle non-compliance. Taxpayer confidentiality means that HMRC will not be able to share the results of any follow-up action with the department.
Actions for contractors to take (based on the requirements in the PPN):
- Take the HMRC business entity tests. UPDATE - 2014: The Business Entity Tests have been dropped (but public sector end-users may still be using them)
If Low risk – you will be asked for a signed declaration to state that you have taken the tests, the number of points you scored and that you have gathered and retained enough relevant and reliable evidence to support your score as required by HMRC. The engager should do nothing more other than to record the number of low risk cases for statistical purposes and to keep your signed declaration.
If Medium or High risk AND you believe you are outside IR35. You should provide evidence of an IR35 contract review undertaken by either HMRC or another acceptable provider and you will be asked to sign a declaration that you have taken the tests and are medium or high risk, the number of points you scored and that you consider yourself as outside the scope of IR35. The engager should do nothing more other than to record your case for statistical purposes and to keep your signed declaration.
- If Medium or High risk AND you believe you are inside IR35. You should sign a declaration that you are medium or high risk and that you consider that this engagement is inside IR35 and you will commit to provide evidence that they have operated IR35 after the end of the tax year. As this is not declared until May 19th you may be asked to provide this by, say, May 31st. The engager should do nothing more until the agreed date.
All of our clients who have used Bauer & Cottrell IR35 contract review services will be provided with an assurance certificate for presentation to public sector engagers. We will also provide assistance and further guidance to you.
What should contractors bear in mind?
- Most PSC workers will fall into the Medium or High risk bands
- You may be given strict timescales to provide evidence and it is unrealistic to expect you to obtain an HMRC IR35 contract review in just a few weeks. Many contractors are reluctant to use the service. Some IR35 insurances are void if the contractor uses the HMRC IR35 service. The reality is that the HMRC service is entirely confidential and independent of HMRC compliance activities. However in the event of disagreement as to the IR35 status, the request for an opinion could lead to a full blown tribunal hearing.
- Your chosen IR35 contract review provider should have taken full account of the new assurance processes and advised you accordingly. You should also always seek their opinion on your IR35 status in writing.
- The provision of information for the assurance process is the responsibility of the contractor/PSC/his or her advisor.
- There is already evidence of misunderstanding of this new assurance process with some departments issuing incorrect information and some going much further than apparently required to do. For example, applying it to every worker irrespective of rate or length of contract and assuming that every worker is inside IR35.
- It is not necessary for the engaging department to have an in depth knowledge of the IR35 legislation or to make a judgment on a worker’s IR35 status in order to administer the assurance process.
This underway exercise (- the assurance process to reflect the off-payroll rules) is currently targeting those contractors earning at a rate of £220 per day and for contracts lasting more than 6 months from August 2012, AND the engager also has to consider applying the same policy to ALL those not on the payroll. But this is a policy that any employer/engager could instigate and we could see it being widened to include any worker/contractor, irrespective of rate or length of contract. We will have to wait and see but for now, this should be seen as an IR35 wake-up call for anyone who is declaring themselves outside IR35 whether engaged by the public or the private sector.
Editor's Note: An updated version of this article is available.