Contractors' IR35 status to rest with public sector clients

Personal service company contractors in the public sector will lose their say on whether they are caught by IR35, under Finance Bill 2017 clauses and documents published yesterday.

In fact, the responsibility to pay tax if the Intermediaries legislation applies will move from the worker to the staffing agency or third-party who pays them, the documents confirm.    

But the responsibility for deciding if IR35 applies is always going to be the end-user’s, even if an agency is present, and the end-user must “reply” to requests about its decision within 31 days.

If they take longer to reply, either to the agency or to the PSC -- which can ask how they came to their decision -- the end-user becomes responsible for accounting for PAYE.

‘Big surprise’

This aspect of IR35 in the public sector from April is revealed in a medley of new IR35 documents -- guidance; case studies, the reply to the consultation and an impact note. It represents one of the few standout points.

“[There are] no major shocks,” reflected EY's executive director John Chaplin, “[but] it does appear that the IR35 decision will rest with the public sector body even if an agency is involved.”

Qdos, an IR35 advisory confirmed yesterday afternoon: “The big surprise, which has caught a lot of people off-guard, is that the public sector body will be responsible for determining a contractor’s status.

“The firm expectation,” added the advisory’s CEO Seb Maley, “was that [it was going to be] the party paying the worker -- normally the agency -- [that] would have to do this.”                                            

‘Someone who doesn’t know the contractor’

Status specialist Kate Cottrell explains why contractors are unlikely to welcome this new development, even though recruiters will likely regard it as a bit of a reprieve.

“Clients have been given 31 days to provide the information on the status of the engagement and if they do not they [not the agency] become liable,” the Bauer & Cottrell co-founder says.

“It is stated [in many of the new IR35 case studies] that the public sector client is ‘experienced’ in deciding IR35 because of the ‘assurance’ processes. In my experience, this is not the case.”

She added that HMRC’s new guidance declines to specify which employees at public sector outfits are going to have to make the important decision about contractors’ IR35 status.

“In IR35 cases the only people who can comment on individuals are those with hands-on experience of the day-to-day”, the former tax officer added. “Certainly not someone who doesn’t know the contractor.”  

‘Significant initial impact’

Another ex-tax official agrees the assurance process is too slim a basis to believe end-user staff can now accurately test for IR35, because the process is “less involved” than the test.

Rather than risk getting it wrong, Qdos’s Mr Maley says the concern for PSCs is that such end-user staff will simply err on the side of caution, prompting ‘inside IR35’ decisions.

Nonetheless, the changes are expected to have a “significant initial impact” on public sector organisations that engage PSCs, admits the Revenue in its impact assessment of the reforms.

The April changes will also exert a “significant initial impact” on agencies supplying workers to the public sector, notably “smaller agencies” whose compliance costs will be “significant.”

‘Very concerning’ for ‘26,000 PSCs’

A saving to agencies of £300,000 a year is then promised in HMRC’s note, but not before a recognition of another upshot of the reform which could wipe out that saving altogether.

“Some of those [temporary professionals] affected may cease to operate as the owner/director of a limited company,” the Revenue acknowledges. “This measure will [in total] …affect around 26,000 personal service companies.”

But an initial analysis last night by Bauer & Cottrell implies this estimate to be conservative. The seven case studies of ‘inside IR35’ are drawn extremely widely -- something PSCs will find “very concerning.”

The status advisory explained: “The fact that you are in a team; have to do the work at the client’s premises, provide no equipment, get free parking and are ‘managed’ puts you inside IR35. 

“And there’s no definition of ‘managed;’ so it could mean anything. Plus all the criteria [in the examples] other than ‘managed’ could apply to any contractor providing services to a large organisation”.

‘Unrealistic’

Seeming to make ‘outside IR35’ contracting difficult for end-users to spot, just one of HMRC's eight new IR35 case studies depicts a situation where the Intermediaries legislation does not apply.

Moreover, “the criteria listed for the only example outside the rules is unrealistic,” Cottrell said, referring to the 'website designer' case study in the web version of the HMRC’s new guidance.

“They refer to Jasmine having a 'large amount of control' and that she is 'largely unsupervised”. 

More positively for business, “consultancies” seem beyond the scope of the new rules, which will inspire further HMRC guidance and an Employment Status Service for PSCs and their advisers from April.

‘Seeking legal advice’

This online service will contribute to the £1million in IT costs the Revenue says it is facing to make the new IR35 changes, most visibly with an IR35 digital tool (beta) in January.

But despite having its efficiency doubted before it is even live, the tool is not the aspect of the changes that most concerns the Association of Independent Professionals and the Self-Employed.

In a statement last night, IPSE said: “[We are] seeking legal advice on challenging point 37 of HMRC’s guidance document… [and] point 51.

“[Point 51] states that if the contractor seeks employment rights while having to pay employment taxes it should be the PSC that grants these not the client or fee payer.”

Referring to point 37, Mr Bryce said the government “cannot expect contractors to accept being treated as employees, while having pension and other employment rights withheld.”

‘Hugely disappointed’

A contractor accountancy firm, DNS Associates, is another believer that PSC workers are being forced to accept a raw deal.  

“We’re quite worried for public sector contractors. But more than that; we’re hugely disappointed at the way this government is trying to tackle contractors’ self-employment.

“The government is failing to grasp the contribution of self-employed contractors, as these measures will not just pull away talent from the public sector.”

The firm specified: “The measures may actually pull talent away from the UK, just at a time when Brexit means we’ll be needing to retain -- and attract -- as much talent as possible.”

IPSE chief executive Chris Bryce has a similar view. “It would be understandable if contractors decide against working in public sector roles in future.

“Equally,” he said, moving to imply that PSCs should explore a range of actions before April, “many will want to review their day rates to ensure their business can maintain its income.”

‘Include status BEFORE signing’

Indecision is the one course that Ms Cottrell advises contractors not to take. “Those that may go into the public sector should take urgent action now.

“[As well as strongly considering] getting their IR35 status checked, they should get up-to-speed with the factors that decide IR35 status. 

“[We also advise that] their status needs to be clearly included in contracts before signing," she said. "And yes; it all still smacks of a dry run for the private sector, so the same advice holds for all contractors.”