Guidance for Public Sector Workers
Contractors working in the public sector are affected by the new set of IR35 rules known as ‘off-payroll’ working. Note that these rules do not affect contractors working in the private sector. The rules are complex and confusing warranting a guide on how the new rules work and what you should do to protect yourself as a Contractor.
How the New IR35 Rules Work?
- The New IR35 or ‘off-payroll’ rules apply to a contractor who provides their services directly to a public authority or through an intermediary or PSC
- The new ‘off-payroll’ rules state that contractors who perform services to the public sector are deemed to be employees with regards to Income tax purposes and NICs
- This will be determined by the public authority or agency that hires and pays the contractor’s intermediary and not by the intermediary
- The means that the public authority or agency known as the ‘fee payer’ is now responsible for paying PAYE and National Insurance contributions (NICs) for the contractor
- The ‘fee payer’ is treated as an employer of the contractor for NICs and tax purposes
When will the New IR35 Rules be implemented?
The new rules will apply to payments made by the ‘fee payer’ (public authority or agency) on or after 6 April 2017.
Note that contracts that are operational on or after this date (6 April 2017) will have to abide by this new rules. It is advisable that contractors hired by public authorities and agencies or work through PSCs should consider their current contracts to prepare for these new rules.
Who do the rules affect?
The New IR35 ‘off-payroll’ rules apply to the following:
- Contractors working for the public sector through a personal service company (PSC)
- Public sector organisations and agencies who contract contractors out through PSC’s to the public sector
- Partnerships who act as an intermediary for contractors
Do the rules affect agencies?
The new ‘off-payroll’ rules do not apply if:
- An agency hires a contractor out for work as if they were their employee and pays their PAYE and NICs
- Hires them as a self-employed contractor
The IR35 digital tool?
This new digital tool known as the ‘Employment Status Service ‘ should be available before the 6 April 2017. It will help the ‘fee payer’ decide if the new IR35 rules apply to the contractor they hire.
An employment status test must be performed to deem if a contractor is an employee of the ‘fee payer’ in the following way:
- If the ‘fee payer’ pays an intermediary, then they must examine if the contractor hired by the intermediary could be classified as their employee if no intermediary or PSC existed
- If the test shows that they would be classified as an employee, then the new IR35 rules apply
Why are these changes been made?
HMRC wants to provide a fairer tax system where contractors will not be able to avoid paying employment taxes and NICs through working for PSCs. The 5% allowance for administration costs for applying ‘off payroll’ rules will be removed to simplify administration. Public sector bodies must provide agencies and their contractors with the necessary information about whether they fall within the ‘off-payroll’ rules. Hence, public sector bodies will now be responsible for paying PAYE and NICs for contractors instead.
Who is at risk of HMRC IR35 Investigation?
Those contractors who work for a PSC who have contracts with public sector bodies which will still be in effect on or after April 6th. This poses a risk as the public sector body may apply the new ‘off-payroll’ rules on or after April 6th even if the contract was entered into before this date. HMRC may very well open an IR35 investigation if public sector bodies apply the new rules to those who were once outside IR35 rules.
It is advisable that those contractors who still want to work with public sector bodies create new contracts that contain the correct clauses that take the new IR35 rules into account. These new contracts should be applicable from April 6th 2017 so that contractors are better protected against IR35 investigations arising from the new ‘off payroll ‘rules.