Now we have both the final* tax and NIC legislation regarding IR35 in the public sector I can now start to see what the new regime will look like from a practical point of view.
(* I say final but this legislation doesn’t officially get finalised until the summer, but it is now unlikely to change).
1. The hirer
Public sector bodies now need to tell the fee payer what the IR35 position is prior to the role commencing. Hirers will now need to implement a communications process with their agencies and ensure they have a clear audit trail of what they have communicated, when and to whom. In addition they should consider asking for confirmation from the agency that the message has been received and understood. Failure to have this audit trail could result in the inadvertently becoming responsible for the PAYE.
Public sector bodies now also have to take “reasonable care” when making their IR35 assessment or they could become responsible for the PAYE. This initially sounded a good outcome, however, I think this will increase the chances of an inside IR35 assessment by the public sector body as they won’t want to run the risk of making an incorrect assessment without taking “reasonable care.”
Some hirers are still taking blanket policy views based on directives issued from their own regulatory bodies. For example NHS Improvement now need to approve the use of PSCs regardless of the IR35 position and have issued NHS Trust’s with their view on roles which fail IR35 and roles which could pass subject to a review.
2. The agency
There is no longer an obligation on the agency to ask the hirer for a view on the IR35 position. You could consider this as a potential “get out” because if the hirer doesn’t tell you then they carry the tax risk. This is a dangerous approach though as the IR35 view could be hidden in a contract, mentioned in an email, phone call or meeting. My view would be to ensure a communications process is agreed between both parties.
Unfortunately there is no requirement in the legislation for the agency contracting with the hirer to pass the IR35 view to any tier 2 agencies. Open lines of communication up and down the supply chain are now crucial to ensure the agency paying the PSC does not inadvertently assume the hirer has not communicated their view on IR35 because the tier 1 agency has not passed the message on.
If the hirer advise IR35 applies then the agency (as fee payer) needs to ensure PAYE is paid. Typically this will be agency payroll (to individual), agency payroll (to PSC) or umbrella company. No doubt news models will appear so continued management of compliance PSLs is now more important than ever. Schemes are out there abusing the employment allowance and more recently involving “marketing” costs to reduce the tax – HMRC are aware of both of these and should you be found to be promoting them you could be fined up to £1m.
Note: if you are paying a PSC after deducting PAYE the legislation now requires you to adjust the contract rate to reduce it by the employers NIC element.
Finally, the agency can ask the public sector hirer for a reason why they came to their decision on IR35 and the hirer has to reply within 31 days or it become responsible for the PAYE.
3. The contractor
Contractors working in the public sector now face pay cuts based on their end hirers view on their IR35 position. Contractors are seeking rate increases to cover this. I think there are 2 scenarios here:
1. If your role is genuinely caught by IR35 and you have not been paying the correct amount of tax then I think it would be difficult to justify a rate increase.
2. if you role is outside of IR35 and you can back this up with an independent review then I think you have more of a chance of negotiating a rate increase – the outcome more likely to be a reversal of the IR35 opinion.
Contractors now have an obligation in the legislation to advise their agency (or client if working direct) if they are working through a company and they own more than 5% of the shares (this is triggers the IR35 rules). If this is not communicated then the agency has to assume that these tests are met and therefore they have contracted with a PSC.
Contractors should also consider whether PSC is still the right payment vehicle for them and consider other ways of working. Switching to the private sector to carry out the same work which is caught by IR35 but not paying the correct tax is a risky move as HMRC have said they will police the private sector more
4. Composite service
Unfortunately there is no clarity on whether the rules apply is a outsourced service provider uses a PSC to work on a contract where the public sector is the ultimate end client. For me, it depends on what is being provided. if this is just bums on seats at the public sector client premises then the rules will probably apply. If this is the delivery of a project away from a client sit with the PSCs managed by staff at the consultancy business then the rules are likely not to apply. Agencies remodelling themselves as composite / outsourced service providers need to take care here.
We are now entering the period of transition, straddling payment pre and post 6 April. Communication is key during this period – hirers need to communicate their view / policy on IR35 with their agencies – agencies need to communicate with their candidates and now should be the time that the served providers you work closest with earn their crust. There will be new models and new providers looking to take advantage of this period of uncertainty – be careful not to jump out of the frying pan into the fire.
Interested in views on this – from the hirer, agency, contractor, service provider, innocent bystander!…….