Changes to IR35 sees responsibility shift to public sector end clients
From April 2017, public sector bodies will be responsible for operating IR35 instead of recruitment agencies the HMRC has revealed. What problems could this cause for contractors?
A draft legislation was released by HMRC on December 5th along with technical notes known as off-payroll working in the public sector: reform of the intermediaries legislation which explains how to apply IR35 to public sector bodies from April 2017.
These documents show that end clients will be in charge of defining the IR35 status of contractors when an agency is part of the chain.
How does this change things?
It was generally the responsibility of agencies to determine IR35 in the public sector. This means that the change to move this across to public sector bodies came as a shock but it is something that was thought through in advance. It has been highlighted by the draft legislation that the public sector body will be in charge of deciding whether a worker is within the IR35 or not. They then have the responsibility of advising the agency in the correct way so that they can deduct PAYE and NI should the worker be within the IR35.
Will this have an impact on contracting in the public sector?
Not a lot will change because the main areas of the proposed reform to the rules have not altered; it is simply the part that is implementing them that has changed. However, it is likely to there is more of a risk to public sector bodies than agencies because they will be fearful that they could be used as an example.
To look at this in a different light, public sector bodies will be aware of the consequences of taking a wide stance on putting everyone inside IR35. The first risk is that they will have a large number of contractors who will be earning less money which could see them leave. There would also be more costs involved in the time it takes to manage the new process but also in employer national insurance which currently stands at 13.8% which is not a considerable cost. It is still the agencies responsibility to pay employers NI but the cost will have to be passed along the line.
Are there any liabilities?
There are questions surrounding liability. As the public sector body makes the IR36 status decision it is not unusual to think that they are responsible for any errors that they make.
Despite this, the legislation contains nothing that relates to liabilities. As the agency will be classed as the employer for tax reasons for those who are working within IR35, they will be the ones who are responsible for any tax retrospectively should there be a challenge made against the status. However, the legislation is still at draft stage and this means that changes could be made before April 6th.
About the author
Javeed Baig is a senior accountant and managing director of Gower Accountancy, a Leicester based accountants who provide their services to a range of sectors from doctors and dentists to the motor trade and website developers. They have built a great reputation on their high quality personal and professional service.
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