IR35 changes in the public sector came forward in legislative reforms announced in the Autumn Budget in 2016. With the private sector reforms set to largely mirror these reforms onto private sector organisations, we look at the changes that have been in play since the introduction of IR35 reforms for the public sector were announced.
Who is affected by the IR35 public sector legislation changes?
The legislation, referred to by HMRC as the ‘off-payroll working in the public sector: reforming the intermediaries’ legislation’ affects public sector bodies, but that does not necessarily mean that contractors will naturally fall within IR35. These changes apply to public authorities who hire off-payroll contractors. Public authority means a public authority as defined for the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002.
For example, areas that could be affected include:
- Government departments
- The BBC
- Channel 4
- The Bank of England
- The NHS
- Police and Fire authorities
What prompted these changes?
There have been a series of high profile media stories on the growing use of contractors in the public sector.
HMRC aimed to foil disguised employment. This legislative change means the way which IR35 is enforced in the public sector, shifts the responsibility away from HMRC and onto the end client i.e. the public sector body.
Therefore, the contract should already be pre-determined before the contract comes over to the agency.
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When did the public sector IR35 changes come into force?
The changes came into force on the 6th April 2017. They only apply to contractors working for public sector organisations; this is set to change in April 2021, when private sector legislative changes are set to become active. Instead of contractors determining their own IR35 status, the government shifted this responsibility onto public sector organisations.
If a contractor is deemed to be inside IR35, the engager (i.e. the public sector organisation or the agency) will deduct income tax and National Insurance as they would for employees.
How do public sector organisations and agencies decide if a contract is inside or outside of IR35?
HMRC’s online IR35 tool – the Check Employment Status for Tax (CEST) tool. The tool asks users a series of questions about the nature of a contractor’s engagement and determine their IR35 status based on the answers given.
HMRC has now published the Check Employment Status for Tax (CEST) tool. Click here to use this service.
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What if my contract is ‘deemed outside IR35’? Can I still be deemed an employee?
Yes. If the contract does not reflect the reality of the working practices, then it offers no defence. This has always been the case but in practice is very difficult to enforce. By shifting the burden to the end client and asking questions about the day-to-day reality of the engagement, HMRC is hoping to arrive at a solution which is quick and inexpensive to administer.
Is there a risk that the online IR35 tool will be biased?
Organisations which represent contractors, including SJD Accountancy, have raised this concern. As such, we will be working with HMRC to test the tool and ensure that it accurately reflects workers’ employment status.
Is it still beneficial for contractors to work in both the public and private sectors?
Yes, it is still beneficial for the contractor. This is dependent on the length of the public sector contract and each individual’s personal circumstances. We would always ask clients to speak to their accountant for a more comprehensive understanding of this.
Is a limited company working inside IR35 still a beneficial option?
Working through a limited company whilst inside IR35 still comes with the following benefits:
- Contractors can still register for the Flat Rate VAT scheme whilst working inside IR35.
- Contractors will be no worse off using an umbrella company over a limited company as fees are often the same, in fact, some umbrella companies charge more than accountancy fees.
- Once a limited company is set up contractors can then trade through it for other assignments which might be outside IR35.
- With a limited company, all payment is paid directly into the company’s bank account. However, with an umbrella company, the money flows to them and then to the contractor. A few years ago an umbrella called Prosperity 4 went bankrupt and the contractors didn’t get paid.
Are the underlying criteria of the IR35 test changing?
The criteria for determining whether a contract falls inside or outside IR35 will remain the same. For example, if a worker is under the supervision, direction and control of the end client, they will be deemed inside IR35.
The only thing changing is that the responsibility for determining the contractors IR35 status is moving from the contractor/PSC to the public sector body.
Is this part of a wider crackdown on non-compliance with IR35?
Determining whether a contractor passes or fails IR35 requires detailed knowledge of their working arrangements, not just the contract. Hirers are ideally placed to know the details of their contractors’ working arrangements, which is why HMRC is keen to shift responsibility and liability to them.
How will the public sector changes affect contractors take-home pay from 2019?
Below you will find an average take-home calculation for those working inside IR35 and outside IR35. All contracts are different, so we always advise that should a more detailed breakdown be required please speak to your accountant.
|Outside IR35||Inside IR35|
|Daily contract value||£400||£400|
|Take home *||£76,608.00||£68,859.44|
*Please note, the above calculations are just an estimate and are based on 230 working days, some basic expenses and the contractor being on the flat rate VAT scheme (including 1% discount).
So contrary to much uncertainty in the market, as a contractor, you may be better working inside IR35 through your own limited company. For more details on going limited, take a look at our easy to read the guide for advantages and disadvantages of going limited.
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If you are unsure about any of the above queries, please do not hesitate to contact us on , or by filling in the form below. We will be sure to update you on any changes to this legislation as and when we can.