Clamp down on public sector contractors

When the Chancellor delivered his budget today he made reference to the need to clamp down on what he perceived to be the big problem of off-payroll workers in the public sector. He was referring to contractors who are using a personal service company (PSC).

The government introduced intermediaries legislation (IR35) in 1999 to combat tax evasion by off-payroll workers as it was felt that some contractors were working more like employees, but weren’t paying the appropriate level of tax and NI.  There has been much discussion over how this legislation is enforced and these changes will start to clarify that, starting with public sector contractors. They believe the non-compliance of these rules in the public sector to be £400 million a year.


What is changing?

From April 2017 the responsibility will fall on the public sector body (or the agency if the public sector has used one) to determine whether the IR35 rules apply and they will also be liable for ensuring the right amount of tax is paid. This is a big change to the current rules which hold the contractor's Limited Company liable for payment of correct taxes.


Who is responsible?

The employer (public sector body), agency or third party will be responsible for determining whether the rules apply and accounting for salary through PAYE. It will be the party closest to the worker’s limited company in the supply chain who will be required to comply with the rules.


How will they decide who is caught?

HMRC will introduce clear, objective tests for employers to use to decide at the point of hire whether or not they need to even consider the new rules.

If the situation is still not clear after applying these tests, new digital tools will help make a final decision.

Although these new rules only apply to public sector contractors, private sector contractors (along with other businesses and agencies) can make use of these new digital tools also.


What classes as a public sector body?

Public sector, for these rules, is defined as:

  • Government departments, legislative bodies, armed forces
  • Local government
  • NHS
  • Schools and further and higher education institutions
  • Police
  • Other public bodies (listed in a Schedule including bodies such as The British Museum, BBC, Channel 4)
  • Publically owned companies (wholly owned by the Crown and/or the wider public sector such as Transport for London)


What’s next?

For any contractors working in the private sector the IR35 rules remain as they were.

Although these new rules only apply to the public sector it would not be a huge stretch for the government to extend these out to the private sector in the future if they deem them to have been successful.

These changes will be subject to a full consultation, expected shortly, with draft legislation to follow in Finance Bill 2017. We will keep a close eye on this when it is released and update you with any news.


You can read HMRC’s technical note here.

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