So HMRC’s latest consultation proposal is hot off the press (published on 26th May) and is looking to change the way IR35 works as far as the “public sector” goes. Please bear in mind that this is only the consultation document, so it will more than likely have an abundance of changes during the consultation period prior to implementation in April 2017.
As always here at Liberty Bishop we aim to keep you informed of any pending legislation that will affect the contracting market and in this case it will be contractors and recruitment agencies.
Below you will find a summary of the consultation document. Although Liberty Bishop will be submitting a formal response and engaging fully in the consultation process, we would love to hear from you and would be happy to incorporate your thoughts into our correspondence and conversations with HMRC. Please feel free to email: email@example.com
So what’s the basic outline of the proposals as things currently stand?
The proposal in short
From 6th April 2017, HMRC proposes that when a worker is engaged in the public sector via their own Limited company (PSC), it will no longer be the worker who determines their IR35 status. Instead, this responsibility will sit with the engager closest to the PSC in the contractual chain. Depending on how the contractual chain is structured, therefore, this could mean that the liability for determining the IR35 status could sit with the public sector body themselves, the recruitment agency, or potentially any other third party entity.
In instances where the relevant body has determined that IR35 does apply, both the PSC and the engager will pay broadly the same tax and NIC’s as they would have done were the relationship one of employer/employee, thereby supporting the established principle that contributions should be determined by how work is performed, not by the nature of the structure that the individual engages through.
In these caught-by-IR35 scenarios, the entity sitting next to the PSC will need to calculate the tax and NIC liability and then account for these through the Real Time Information (RTI) system. What that means is that the entity next to the PSC will need to deduct the workers tax and employees NIC’s before making the payment to the workers PSC, and also pay employers NIC’s contributions as well.
The scope of the changes
As mentioned, these changes only impact upon work carried out in the “public sector”. What counts as the public sector is to be determined by the definition offered-up in the Freedom of Information Act (2000) and the Freedom of Information (Scotland) Act (2002). Briefly, this covers entities such as:
• Government departments, executives agencies and non-departmental public bodies
• The NHS
• Police and fire authorities
• Local authorities
• Devolved administrations
• Educational establishments (including universities)
• The BBC & Channel 4
• The Bank of England
Whilst we don’t think there’s any controversy over what is classed as a public sector body, I personally cannot think of any good reason why tackling abuse of IR35 should be limited only to the public sector. I strongly suspect, therefore, that the public sector is being used as a “guinea pig” and that these changes will be rolled-out across the private sector at a later date should they prove effective in achieving their aims in the public sector.
Applying the test and determining the IR35 status
Alongside the proposed shift in responsibility for determining the IR35 status, HMRC also intend on making it easier to determine whether a worker is inside or outside of IR35 by “stripping-back” IR35 to the issues of personal service and control. In short, the worker is caught by IR35 if the answer to the following two questions is “yes”:
• 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?
If the answer is not “yes” in both instances, however, HMRC will make available a digital tool to offer additional support in determining the status of the worker. Provided that the tool is fed with accurate information, HMRC propose that they will be bound by the test outcome, thereby giving the user a degree of certainty around which they can operate.
Enforcement via a debt transfer
As is now usually the case with legislation introduced in the contracting sphere, HMRC’s plan is to ensure compliance via a debt transfer provision. At this stage the proposed debt transfer options are that the debt could sit either jointly and severally with the engager and the PSC, with the engager alone, or on the PSC or the PSC director/employee in instances where they have supplied fraudulent information about their situation.
As aforementioned Liberty Bishop will be submitting a formal response and engaging fully in the consultation process, we have until 18th August 2016 to submit responses and would really appreciate your input so that we can incorporate an overall response to HMRC, as with previous consultation experience has shown the more thorough the response the more likely HMRC will pay attention!
The official document which contains the consultation questions can be found here:
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