From April 2017, the government is intending to introduce new rules for contractors working in the public sector, which will apply to almost all public sector bodies, including, but not limited to, government departments, local government, the police, NHS, universities and schools.
The responsibility for deciding whether IR35 applies will move away from the contractor to the public sector employer or the relevant engager such as a staffing company or procurement manager.
The new rules will mean:
- Where a public sector employer engages a contractor through a staffing company, that company will be the relevant engager.
- The relevant company would be required to collect the relevant tax and national insurance contributions using the HM Revenue and Customs Real Time Information (RTI) system.
- Where a contractor is engaged through a variety of third parties, the party closest to the worker’s limited liability company in the chain will be the relevant engager.
- The responsibility and liability of IR35 passes from the contractor to the agency (or party paying the contractor – including consultancies or direct work). This means that the agency will have to assess each engagement and make a decision as to whether it is outside or inside IR35.
- If it is outside IR35, the contractor can continue to remunerate themselves as they see fit, although the agency would face the bill if the decision was questioned and overturned by HMRC. If the engagement is inside IR35, the agency will have to deduct PAYE and NI prior to paying the contractor.
- There will be a removal of the 5% deduction that is allowed to contractors for notional expenses.
- This new legislation will be applied to payments made on or after 6th April 2017, even if the services were supplied before that date.
- Payments that staffing companies make to contractors within IR35 will count towards the staffing company’s salary bill for the purposes of the apprenticeship levy.
HMRC is developing an online tool for assessing IR35 status and end user clients will probably use this to assess employment status.
Once the client/end user informs the staffing company of its views on the contractors’ status for IR35 purposes, the staffing company then has 31 days to raise questions on the client’s/end user’s reasons for reaching its decision.
The changes are likely to throw out many questions, and as always, we advise all those who may be affected by these new rules to take independent advice to ensure that they are protected as far as possible.