IR35 Update: The Future of IR35 in the Public Sector
Changes to the venerable IR35 legislation are afoot. From April 2017, if there is a public authority client in the contractual chain, new IR35 rules will apply. The changes are relatively small, but the impact could be massive.
Briefly, IR35 is the part of the tax code that governs how ‘off-payroll’ payments should be treated for tax purposes. In construction, it most commonly applies to so-called personal service companies (PSCs). If an individual hires out their personal services (ultimately) via an intermediary in which they have at least a 5% material interest, then it is necessary to consider the relationship between the hiring client and the individual, applying the many and varied employment status tests.
Simply put, if, on balance, the individual would be classed as an employee of the client business if there were no intermediary (i.e. their PSC), that individual is within IR35 and accordingly payments made to them are subject to employment taxes (PAYE and class 1 NICs), with a 5% allowance for expenses. Currently, the liability for these employment taxes, plus any penalties and interest, falls on the intermediary. The government has long-suspected there is a great deal of non-compliance with IR35 throughout the UK economy, leading to vast amounts of lost tax revenue.
So What’s Changing? If a client falls within the definition of a public authority in the Freedom of Information Act (FOI) 2000 – simplistically, if they’re obliged to comply with FOI requests – then the new IR35 rules will apply. This covers a wide range of organisations including local authorities, the NHS, schools and Transport for London, among others.
The major change is that when a public authority client is in the contractual chain, if the individual’s services fall within IR35, then the tax liability will generally fall on the party (the Fee-Payer) that contracts with the individual’s intermediary (again, think PSC). Furthermore, the current 5% expenses allowance will not apply.
The employment status tests remain the same – how integrated is the individual into the client business, is there a personal service obligation, is the individual subject to supervision, direction or control and so on.
The word liability tends to draw focus, but it’s important to recognise two points. Firstly, the new rules won’t apply to the private sector. Secondly, simply because IR35 may be applicable doesn’t mean that it absolutely is applicable – if the individual is genuinely in business on his or her own account, if they have ‘IR35-friendly’ contracts including a genuine and actually enforceable right of substitution, then business should be able to carry on as normal.
If IR35 does apply, then the individual should simply be paid net of employment taxes. As ever, it’s a question of applying the law to find the right answer; never easy when it comes to the complexities of employment status. Time will tell whether the new law has the desired impact. In the meantime, if you contract with PSCs and have any IR35 concerns, we’re more than happy to help.