Public Sector IR35 – the new rules from April 2017
As of April 2017, there are fundamental process changes for Personal Service Company (PSC) contractors working within the Public Sector. Below we summarise the legislation so far according to how it effects the Public Sector End Client, our Agency partners and the PSC itself. Please note that the proposed legislation may still be adjusted.
Headline Points It will be the responsibility of the Public Sector End Client to determine a PSCs IR35 status, not Recruitment Agencies. The end client must provide the IR35 status to the agency who pays the PSC, who will need to deduct PAYE/NICs from the net invoice if the PSC is ‘inside IR35’. Umbrella looks to be the model of choice for those ‘inside IR35’ on public sector assignments, to save on complex admin & deductions.
01 Nasa Group
NASA will be working hard to assist our PSC clients, agency partners and their public sector clients to ensure compliance, minimise risk and make sure those who are genuinely outside of IR35 can still operate as they do now.
With our established IR35 Appraisal process, we only advise contractors who are genuinely outside IR35 to use a PSC, whether they are public or private sector. We’ve assessed our PSC client base currently in the Public Sector and will be supporting them in completing HMRCs new Digital Tool (expected in March 2017) for supply to their end clients.
PSC contractors who are ’inside IR35’ can operate via NASA Umbrella whilst on public sector assignments. This will save our agency partners from incurring additional costs, amending systems and making complex tax deductions on payments to the PSC.
02 Recruitment Agencies
Agencies will neither be responsible nor liable for determining the PSCs IR35 status - a welcome change from the initial proposals. The Public Sector End Client must provide evidence to the agency to support a contractor being outside.
For those PSCs that are ‘inside IR35’, the agency will need to deduct PAYE & Employee NICs. On top of this, the agency will also have to pay Apprenticeship Levy (where applicable) and Employers NIC. We anticipate this will operate in practice as a reduction in the advertised contract pay rate to the contractor. This would see 13.8% Employer NIC and 0.5% Apprenticeship Levy being deducted from the contract rate (for example £400 per day becomes £349.96 per day to the PSC).
We envisage end clients and agencies imposing a process where any PSC that is unable to show a positive IR35 status will need to run via Umbrella (or PAYE). Those PSC’s who are genuinely ‘outside IR35’ can operate as they do at present. We would advise our agency partners to request evidence from the End Client & PSC of HMRCs Digital Tool showing a favourable IR35 outcome.
Importantly, the liability will sit with the party completing the HMRC Digital Tool. NASAs expertise in this area further protects our agency partners from additional liability.
Agency contracts will also need to be updated as a result of these changes. This will include potential ‘inside IR35’ deductions and effective substitution clauses (now a much stronger IR35 status indicator) for those ‘outside IR35’.
03 For Public Sector End Clients
Public Sector End Clients will need to identify internal employees who can assess the IR35 status of the PSC contractor. In practice, this is likely to mean they will accept the outcome of HMRCs Digital Tool when completed by the PSCs intermediary (e.g. NASA).
Where NASA complete the assessment on behalf of a PSC Contractor, we will hold the liability for the assessment (so long as the correct process has been followed in the supply chain). NASA would urge against a blanket ‘no PSC’ policy for end clients as this will only act to increase rates and make public sector roles less attractive to the flexible workforce.
04 For Public Sector (PSC) Contractors
For those PSC Contractors who can demonstrate they are ‘outside IR35’ using HMRCs Digital Tool, the process can remain as it is currently.
If ’inside IR35’, they will suffer PAYE & NICs at source (deducted by the Agency) which is likely to mean around 25% less take home pay. Assuming they do not move to the private sector or take up a perm role, their options are:
Accept their ‘inside IR35’ position and have tax/NIC deducted from a reduced pay rate via the agency. It is worth pointing out that despite paying employment taxes, the PSC will not be entitled to employment benefits
Use an umbrella company for their assignment. This has the added bonus of removing admin & cost burden to the agency from engaging an ‘inside IR35’ PSC. We would suggest this is the simplest option for those ‘inside IR35’
Negotiate higher pay rates with their agency to offset the lower net pay
05 Nasa’s Proposed Process
PSC clients in the public sector should have NASA’s IR35 service as part of their overall offering. This is proposed to include:
Completion of IR35 Digital Tool on their behalf (legally allowed), which they provide to the end client. NASA’s IR35 expertise will ensure accurate completion of the tool, and the end client & agency being able to rely on the evidence provided
A review of contracts to ensure IR35 employment status is not present. This is part of our existing IR35 process for each PSC client
PSCs who are ‘Inside IR35’ should operate via Umbrella until they are confident that an ‘outside IR35’ position can be achieved. Only then should they set up a PSC for their assignments.
New referrals post April-17
NASA expects to undertake a simple assessment of new contractors to determine if a) they work in the public sector and b)if they are likely to fail IR35 tests. Only those who are likely to fall outside IR35 can progress to setting up a PSC where the work is Public Sector based.
We hope this post has been helpful, but understand that sometimes an article doesn’t quite answer everything! If you have any questions or wish to discuss any element of the proposed legislation we’d be happy to discuss this further. You can contact us on: 0117 929 7683 (opt 1) or by email to: email@example.com