One aspect of the proposed reforms is that if the decision that an engagement falls ‘outside’ of IR35 is deemed to have been incorrect then the liability for the shortfall in tax would be the engager’s (agency or public sector body). To assist with the decision making process, the government is working on an online tool which will give a decision on a worker’s IR35 status on a particular engagement. Once the tool has been used and a result has been reached then that result is binding and must be taken. Use of the online tool in the public sector is not proposed to be compulsory, and the tool will also be available for use in the private sector.
Although the consultation for the proposed reforms closed on 18th August, HMRC are still having discussions with the relevant stakeholders. When the chancellor delivers the Autumn Statement on November 23rd, it will be revealed whether the reforms will go ahead as proposed. However, the detail of any changes announced in the Autumn Statement is only likely to become evident when the draft legislation for the Finance Bill 2017 is published on 5th December 2016. ICS has been working closely with industry experts, including representatives from HMRC, since the consultation began. Although there has been some strong opposition to the proposed reforms, including from within the government, it is our belief that in all likelihood they will go ahead.
If the proposed reforms go ahead, what could this mean?
Although it is not the government’s intention to amend the IR35 legislation itself, it seems inevitable that we will see a difference in its application within the public and private sectors. It is worth noting here that although the reforms are not currently being considered for the private sector, if we do see a successful rollout in the public sector then it would seem likely that the reforms will be rolled out to the private sector too. However, for now, the outcome may be that there would be a greater proportion of engagements which are treated as being ‘inside’ IR35 within the public sector.
With what is considered to be the risk of a liability resulting from misapplying the legislation, some engagers would take a risk-averse approach and deem some workers’ engagements to be inside IR35 almost by default. The result would be public sector contracts becoming less attractive and/or the rates being driven upwards. After all, contractors who are new to being caught by IR35 will suffer the cost of employer’s NICs for the first time. The government has been explicit in stating that IR35 status here affects the worker’s tax status alone, rather than the employment status, which would make the position even less favourable as employment rights would not be offered either.
What should recruiters to the public sector be focusing on now?
Firstly, it may be necessary to determine which workers would fall under the definition of working within the public sector. For these purposes a public sector body is defined to be one which has obligations under the Freedom of Information Act 2000. Where a worker is found to be operating within the public sector it would also be necessary for recruiters to understand further the circumstances of engagement which the worker is undertaking. IR35 is a complicated area and there are many factors to consider - even the use of HMRC’s online tool would require a thorough knowledge of the engagement. Therefore, it is a good idea to begin thinking about that now. Since the changes are likely to be brought in from 6th April next year, recruiters ought to be considering now the new processes, procedures, technology and contracts etc. which would be required.
ICS will continue to source opinion from experts and those working within the industry so as to advise our PSC clients and agency partners further on the proposed changes and how they might be affected. It is not only important for recruitment agencies to work closely with their clients, but also with the PSC workers and their accountants in order to have comfort in the knowledge that their worker is fully compliant with IR35 and all other legislation which has an impact. As industry experts and IPSE accredited accountants, ICS would be happy to discuss any aspect of the proposed reforms to IR35 in the public sector and how a partnership might work going forward.
Head of Compliance and Risk
Tel: 0800 195 3750
Email: [email protected]