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The simplified guide to IR35 Public Sector Changes in 2017

Craig McCall, Operations & Technical Director at Gorilla Accounting, explains the IR35 legislation reform, and how this will affect your income once it comes into effect on April 6, 2017. 

IR35, or Intermediaries Legislation, is a piece of tax legislation that has been around since the turn of the century. It is intended to prevent what is known as ‘disguised employment’, where an individual that would otherwise be an employee is engaged via a limited company (an intermediary) and receives the tax benefits normally associated with this structure.

Since its introduction, IR35 has received wide scale criticism: contractors and engagers find it confusing; whilst policy-makers believe it to be ineffective. Meanwhile, the political landscape has changed significantly since its introduction and ministers have sought to blur the respective definitions of tax avoidance (legal) and evasion (illegal). It can therefore be said that a change in policy in this area is long overdue.

In the 2016 Budget, the Chancellor announced his intent to consult on some changes to the way that IR35 status is determined for those that are involved in the supply of services to a Public Sector Body. The government wants to be seen to lead by example, and not engage with individuals that they believe to be paying less than, what they consider to be, their fair share of tax.

How is IR35 changing?

The proposed changes put the determination of IR35 status into the hands of the Public Sector Body, rather than the hands of the contractor, as it was previously. The new policy was confirmed in the November 2016 Autumn Statement, and were more draconian than had been anticipated. In addition to moving status determination to the hands of the engager, the 5% allowance was also removed. It was announced that, should IR35 apply, then employment taxes would be withheld by the party closest to the worker (usually a recruitment agent) and a net payment made to the PSC.

The definition of IR35 itself has not changed in respect to the announcement, at this time the determination of employment status, and therefore IR35, continues to rest on old case law - Ready Mixed Concrete (1968). A new online tool is also being developed to assist Public Sector Bodies in making an assessment of IR35 status for their workers – this will follow the judgement of this case.

There has been a lot of speculation around what the new policy will mean for those contracting in the public sector, most of which has been brought about by the lack of detailed information that has been provided by the government to Public Sector Bodies, recruitment agents and accountants. A lot of industry commentary does assume the worst, however there is no provision in the legislation to suggest that all Public Sector contracts will automatically be IR35 caught.

Will I be caught by IR35?

If the new legislation is operated correctly, and the old legislation has been operated correctly then only workers that should always been caught by IR35 will be caught by the new legislation. Workers that are genuinely not caught should not suddenly find themselves caught by the new legislation. If an individual is within the public sector and finds that their status changes without a change of contract, a subsequent IR35 enquiry could in theory then challenge the period prior to the change.

Of course, we do not live in a world with perfect information and where legislation is interpreted and applied perfectly – the reality could therefore be very different from this. There is therefore an argument which suggests that some more-cautious engagers will engineer their contracts/working practices to be IR35 caught, so to minimise their own compliance risk.

It may be the case that the negotiation of contractual terms, and price, comes down to the supply/demand conditions for a particular skill. In order for the Public Sector to complete some projects then they will face the prospect of increasing rates to compensate for the increased tax burden put on the contractor, or ensure that contracts and working conditions put the contractor outside IR35. Failure to do this could result in mass walk-outs in favour of private sector contracts yielding a greater take-home pay, meaning that public sector projects fall behind schedule and/or come at a greater cost to the exchequer.

The government is expected to consult on similar provisions for contractors in the Private Sector in coming months.

Stay updated with the Gorilla blog to keep on track with the latest developments and news.

You can get in touch with one of our dedicated accountants as part of our all inclusive package for Contractors by calling 0330 024 0406, or email info@gorillaaccounting.com. 

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