IR35 Public Sector Legislation Update
Hands up; who’s confused by the recent IR35 public sector legislation? Let me try to demystify it…
I thought every supplier in the UK would be chomping at the bit to hear the latest IR35 public sector legislation update from Capita, so was quite surprised to find myself surrounded by only 35 other recruitment agency leaders on Wednesday.
The CL1 framework’s new HMRC IR35 public sector legislation comes into force from 6th April 2017, and we have been closely following updates and looking at plans for our contractors for quite a while now. However, after Wednesday – am I more equipped to advise all of our contractors? I think so…
Firstly, let’s start with a quick IR35 history lesson. I first started recruiting digital & IT contractors more than 17 years ago, well before the original IR35 public sector legislation came into force. IR35 was created in April 2000, when the then chancellor, Gordon Brown, introduced this “anti-avoidance” tax legislation designed to tax “disguised employment” at a rate similar to employment. Bring this up to present day, it seems that HMRC believes that 90% of the estimated 20,000 contract workers in public sector working outside IR35 today are incorrectly claiming this status.
There are several aspects to consider when determining if you are working outside IR35. From what I’ve seen, the most important principles seem to be:
- Right of substitution which basically demonstrates that you can substitute in other people who can deliver the same services.
- Are you under the control & direction of the client – this should be quite easy for many contractors to demonstrate.
- Mutuality of obligation, which is where the contractor would expect a client to hire them to undertake a specific task, with no expectation of further work being provided after the initial task expires.
- Contractors must be able to demonstrate financial risk. For example, you shouldn’t have a notice period on your contract.
- Exclusivity – Does the individual work for just one client?
To be outside of IR35 you need to be able to satisfy the principles not just on a paper contract but also in reality if you are investigated.
This new HMRC legislation change represents a huge change to the UK’s contracting landscape, and it’s so important to understand the background, what is happening, the implications and the future process. We know there’s a lot of noise and confusion out there, but let’s sit down for a moment and go over what we know, following Capita’s most recent update, and how we can all prepare for IR35:
Firstly, don’t panic!
Let me be crystal clear, IR35 rules have not changed. Genuine ‘outside IR35’ business engagements are still outside of the new rules. The process has just got a lot stricter in the public sector.
Of those 20,000 temporary workers I mentioned earlier, central government provides around 4500 digital & IT contractors in the UK with well paid, and above average length contracts. This will continue moving forward, remaining an attractive option for most contractors.
How do I find out if I’m outside or inside?
There will be a gateway process to assess your status. It will be the responsibility of the contracting government body to determine the status of each contract. You should be able to find out more by taking yourself through the following questions, oh and if you already work in public sector, by providing evidence that you are operating outside IR35 to your relevant decision maker (if you are lucky enough to be an Xpertise contractor we can make suggestions here):
Gateway 1: Is 20% or more of the contract for materials consumed in the service? If yes then you’re outside IR35. To be honest, we don’t fully understand this, so suggest this is one point to check with your accountant. For most, we think the answer will be no, so go to gateway 2.
- Are you (the contractor) required to do the work yourself?
- Does the contracting party (the government body) decide or have the right to decide how the work should be done?
If the answer is definitely ‘yes’ to both questions then the gateway process result will be that IR35 applies. If not, then move onto the next step.
HMRC digital tool: The next step is then to answer the new Employment Status Service (ESS) tool questions online. The ESS tool is the new online digital HMRC platform and is expected to be working from 24th February to assist in the determination process.
Are you currently contracting within the Public Sector?
We know that the government body will be determining your status, but you can still be sitting down with your line manager to go through the questions above. If you provide the right evidence then you stand a good chance of being outside IR35.
Who’s going to be responsible for Tax?
From the 6th April, the agency or closest intermediary to the PSC is the “fee payer” and are responsible for deducting PAYE tax, and paying the appropriate tax to HMRC if you are inside IR35. Importantly, any payments made beyond the 6th April will be caught in the new legislation. That’s why Xpertise will be arranging to pay all of its public sector contractors by 5th April providing of course we have an approved timesheet. *Hint hint*, get it submitted and signed off by your line manager by COB Friday 31st March. We’ll be following up with more information on this so don’t worry.
The new HMRC IR35 public sector legislation states that moving forward the public sector body (as defined by the Freedom of Information Act) will be responsible for determining the status of the worker supplied by an agency. They will also be responsible for confirming the status of the contract within 31 days of request. If they fail to do this, the public sector body become the “fee payer” and are responsible for paying the PAYE tax.
What is this 10th March deadline?
Capita had asked government bodies to review the status of all existing contracts by 10th March. Given the sheer volume of workers in public sector, this is no longer looking like a realistic deadline. We understand they still hope many get processed by then and will upload a certificate showing the contractor’s status, into Fieldglass so it is easily accessible to the contractor and their agency.
What happens after April 6th?
For those who will be delivering assignments inside IR35 from 6 April, liability for deducting PAYE and NICs sits with the Employment Business. For those outside IR35 nothing changes.
For any new contractors hired after 6th April, you will need to confirm if you will be working via a PSC or an umbrella company. We’ll then be able to communicate whether a specific assignment is inside or outside so everything is known upfront.
Brand new contracts will be issued in April for contractors inside of IR35, and will supersede those currently in place. With regards to old timesheets, it was suggested that HMRC will not look at these, but we cannot rule this out completely.
The common assumption seems to be that most contractors caught by IR35 will choose to move to an umbrella company, and leave their limited company open. This is likely to be the most financially efficient way of delivering work inside IR35 in the interim period. The reason being, you effectively become an employee of the Umbrella and Corporation Tax no longer applies. The Umbrella can take proper account of more complicated tax elements such as payments in to pension schemes when calculating deductions.
The advice we would give in this instance is that you MUST make sure you choose an accredited umbrella company. We have a couple of suggestions if you want to talk to us about this.
What are the other contractors saying?
According to this initial research by Capita:
- 15% of contractors surveyed stated they will be sticking it out and seeing what happens
- 70% of contractors surveyed are saying they are unsure/unaware of the process
- 15% of contractors surveyed said that they will leave.
If 15% do leave, this means the market will be further flooded with contractors looking for new roles, which ironically puts downward pressure on daily rates. My advice would be to do your homework before making your decision. With the banks also releasing a lot of contractors, it’s going to be tough for most to walk straight into a new contract.
So, what next?
Capita have a meeting with the government on Tuesday to discuss further and relay feedback from this week’s meeting. We have yet another Capita webinar within the next 2 weeks, so will able to provide a further update.
Oh, and if you’d heard any rumours about the government replacing the CL1 framework with CL2, don’t worry, that’s not happening anytime soon due to the above!
Please trust me when I say we are just as fed up with the lack of clarity as all of our contractors. We do actually care, we are and will continue to work out the best way forward to cut out the confusion and minimise any impact.
Although I can’t make any concrete guarantees right now, I am seeing some positive signs based on a few test cases that look like they will fall outside IR35.
If you have any questions about any of the above, please contact Richard Harrison on 01332 410184.
Disclaimer: Please note that none of the information contained in this article can be considered as advice in any legal sense, nor can it be relied upon for accuracy – this is simply an update on our interpretation of the current situation. The contents are not intended to be exhaustive and the situation is changing rapidly therefore we strongly advise you to take independent qualified tax and financial advice.