Contractors' Questions: Who's caught by April's IR35 changes?

Contractor’s Question: The fear that April’s IR35 changes would be extended to the private sector hasn’t materialised (yet), but I’d still like to know who, precisely, is going to be caught by them. And how will the measures impact my public sector agent and/or end-user?

Expert’s Answer: The government on Monday announced major changes to the IR35 legislation affecting contractors providing services to ‘public authorities’.

The new provisions apply if

• there is no right to substitute
• the client is a ‘public authority’; and
• the worker would otherwise be regarded as an employee of the public authority client, i.e. the public authority client’s capacity is not that of a client of a business carried on by the worker.

If the worker is an ‘office holder’ of the public authority the new legislation will also apply.

The definition of ‘public authority’ is provided by the extensive list in the Freedom of Information Act 2000 Schedule I (everything from the Ministry of Defence to the Advisory Board for Homeopathy), and includes publicly owned companies, but excludes wholly contracted out services, e.g. contracted out parts of the NHS. Given the size of the public sector, this measure is still likely to affect a significant number of contractor companies.

The sting in the draft legislation is that public authorities or agencies responsible for paying a contractor engaged to provide services to a public authority will be responsible for operating the new rules.

This is likely to create confusion and disputes. Contracts drafted by agencies for the supply of services by a contractor using a limited company are invariably biased towards the interests of the agencies’ clients, and often require extensive redrafting by the contractor’s advisor to properly reflect the actual working practices.

Agencies typically use a small selection of contract templates and recruiters may not have the expertise to correctly decide which contract is appropriate. The same can also be said of HR departments in public authorities in respect of engagements where there is no agency in the supply chain. Regrettably, agencies and public authorities for the most part have difficulty distinguishing between genuinely self-employed contractors engaged to provide a discrete business service to the client -- and temporary workers engaged to fill a role.

As the obligation for compliance has shifted to the public authority client, the 5% discount historically allowed for notional expenses is no longer available. However, this is a further tightening of the screw for contractors who may have disagreed with the public authority client and incurred actual expenses in clarifying their employment status.

The expert was Martyn Valentine of The Law Place, a legal consultancy specialising in IR35.