IR35 Contracting and the Public Sector – Here’s What You Need to Know


It was the Autumn Statement of 2016 when the chancellor confirmed that IR35 status would be determined by the public sector client, and not the contractor. This was subsequently introduced in April of this year, leaving many contractors and recruiters with an uncertain outlook with regards to their tax liabilities.

If the public sector client decides that IR35 does apply, then the contractor will be taxed at source, via the Real Time Information (RTI) system. This means PAYE and NICs will be applied to drawings made from an intermediary, such as a limited company.

And despite having to pay tax as if they were employed by the public sector organisation, the contractor will retain the same employment status. This leaves them between a rock and a hard place, as their take-home will be greatly reduced, while they won’t be entitled to the same rights and benefits as an employee, such as holiday pay and pension contributions.

What is IR35?

If you’re not familiar with IR35, it’s a piece of tax legislation that was designed to specifically fight tax avoidance. Its primary function is to identify workers who are supplying services via an intermediary (e.g. a limited company), but would otherwise be classified as employees if that intermediary wasn’t used.

HMRC refer to these workers as ‘disguised employees’.

IR35 status reform in action

As mentioned, the decision as to whether or not a contractor is operating inside or outside IR35 now rests with the public sector organisation. To determine IR35 status, a new online employment status tool is used, guiding the user through a series of questions to assess the situation.

If the contractor is paid via the limited company, and is identified as working as a ‘disguised employee’ then PAYE and NICs will be deducted from the money drawn from the limited company.

The risks facing contractors and recruiters

The major risk we can see involving both contractors and recruiters is that public sector organisations will simply default to a position where IR35 applies across the board, therefore avoiding the various grey areas and risks associated. In circumstances where a recruitment agency is acting as the fee payer, they will be forced to gather enough evidence to support their own assessment that IR35 does not apply, and provide this to the public sector organisation to guide their decision-making process.

With the onus of responsibility placed on the fee payer (be it a recruitment agency or the public sector entity), many are opting for a ‘safety first’ approach in the face of such complicated legislation. This means they’re undertaking the assessment to confirm IR35 does indeed apply, rather than approaching the situation objectively.

This is bad news for contractors on two fronts:

  1. They’re left with a reduction in disposable take home after being deemed to have fallen within IR35 by public sector bodies and agencies who do not carry out the assessment correctly.
  2. And should that occur, the contractor is left open to possible retrospective action from HMRC – something HMRC refuse to rule out as a possibility.

And for recruitment and labour service providers, they’re facing another major headache. The pool of talent they use to provide contractors to the public sector is shrinking, with many opting to sidestep the entire IR35 in or out ‘dance’ and pursue PAYE jobs (complete with rights and benefits) instead of short-term contracts.

What can public sector contractors do to protect themselves?

If you are a public sector contractor who wishes to continue working in this sector, we strongly recommend that you draw up a new, correctly worded contract that defines your role and unambiguously states your position so as not to fall inside the status of IR35.

Take steps to protect yourself today with Ten Forward

We have worked with a number of tax specialists and HMRC advisers in helping clients get to grips with IR35 legislation.

Our friendly staff have the expertise to benefit both contractors and recruitment agencies.

Give us a call today to get started.

  • Share:

Post a comment

Your email address will not be published. Required fields are marked *