IR35 public sector consultation is under way

Yesterday HMRC released consultation for the proposed public sector changes set out in the Budget 2016

The consultation related to “reforming the intermediaries legislation (often referred to as IR35) to improve its effectiveness in the public sector”, which will affect an estimated 26,000 personal service companies.

The private sector has not been left out neither; “with reforming the intermediaries rules for engagements in the public sector, HMRC will continue to explore ways to strengthen its compliance response for engagements in the private sector”, stating that they are “increasing the number of enquiries”, focusing on the “highest risk cases”.

IR35 Public Sector Proposal

In a bid to “improve the effectiveness of the rules in the public sector”, responsibility to apply IR35, will no longer lie with the contractor, and instead will be placed on the public sector body, recruiting agency or other third party paying the worker’s company, who will also be liable to pay the appropriate tax and NICs via the RTI system.

The consultation document seems to take great concern to how the change will affect the organisations to which the responsibility will fall, however appears to fail to see the impact that will be made on genuine contractors, or understand limited company contractors at all.

For simple processing for the body/agency, HMRC will provide a “new interactive online tool” with a “real-time and definitive HMRC view on whether or not the rules apply to a particular engagement.” As a company who has been fighting to defend contractors in IR35 cases for over a decade, the ‘HMRC view’ is not always correct, and so this assumption of the HMRC view being gospel should be a concern for effected contractors.

Further concern comes from the proposed questions themselves. HMRC want to make paying taxes fair between the employed and temporary workforce, however, the consultation assumes that a contractor doing “the same job in the same manner” as an employee makes them the same. It does not take into account that the contractor does not have access to employment benefits nor the permanency of employment.

Public sector contracting is also different by nature to private sector contracting; with tendencies to stricter confidentiality and security measures. The two questions proposed in the consultation do not take this into any such account:

• Is the worker required to do the work themselves?
• Does the engager decide or have the right to decide how the work should be done?

These questions address only 2 (Personal Service/Right to Substitute and Control) of the many status tests which make up IR35, and are asked in a specific manner that would almost certainly always put the contract “under scope”. If the engager only agrees with one of these, you are still not off the hook, and the engager will be required to use the Employment Status Indicator (ESI) which HMRC intends to tailor specifically for determining the employment status of limited companies, and which private sector contractors will also be encouraged to use, and seems reminiscent of the failed Business Entity Tests.

Have Your Say

The consultation will run for 12 weeks until 18 August 2016.

In this time, you will have the opportunity to raise your concerns about the proposed changes. As with the IR35 Discussion last year, should you wish to have your say but would like to remain anonymous to HMRC, please feel free to forward your comments to [email protected] stating that you would like your comments to be put forward anonymously to HMRC, and we will include your responses with our own.

You can access the full consultation here which includes a list of the questions they would like consultation to, on pages 33 and 34. A summary of responses from last year’s consultation is also available within the document, as well as how to respond to HMRC directly.