IR35 in the Public Sector

Off-Payroll Working in the Public Sector

New rules for applying IR35 in the public sector, otherwise known as the off-payroll working rules, came into force on 6th April 2017, impacting all contractors working for clients who fall under the Freedom of Information Act, such as local authorities, universities, and national service organisations.

Public sector organisations hiring personal service companies are required to check the IR35 status (employment status for tax) of their contracted workers, and ensure the correct tax is paid.

This means that contractors working with a public sector client are subject to the IR35 assessment provided by their client, and may have tax deducted at source by the fee-payer, or be required to use an umbrella company. 

Public sector reform is estimated to have increased overall Exchequer revenues by £250 million in the first 12 months according to a government review of the changes, and was widely considered a test bed for extending the rules to the private sector.

What changes did April 2021 bring for the public sector

On 6th April 2021, the off-payroll working rules were extended to the private sector. With this came some adjustments which also applied to the public sector.

One of the major changes was the introduction of Status Determination Statements.

Public sector bodies are required to supply a Status Determination Statement (SDS) to both the contractor and the next party in the supply chain who will then be responsible to pass the SDS on until it reaches the fee-payer.

Another change was the introduction of a client-led disagreement process.

During the introduction of IR35 reform in the public sector, some organisations initially took a short-sighted approach and applied blanket assessments.

Blanket assessments refers to the practice of applying a usually inside-IR35 status to all contractors, or a large group of contractors, without proper assessment of the individual’s circumstances. It’s a risk-averse and short-sighted approach which some organisations mistakenly saw as an easy way out of the rules, leading to mass walkouts and delayed projects.

In response to this practice, the need for a way for contractors to disagree with the determination provided was needed. Organisations must now consider any disagreements and respond within 45 days, however being at the discretion of the client organisation, the process still falls short of ensuring fairness in the process.