Public services are grinding to a halt under IR35 reforms

Guest Blog from Julia Kermode

Julia is chief executive of the Freelancer and Contractor Services Association (FCSA), the UK’s largest independent trade association for umbrella firms and specialist contractor accountants which has been leading a campaign against IR35 reform in the public sector.



Before April 6th, the onus of determining IR35 lay with contractors, it was up to them to decide whether their assignment is inside or outside IR35, and pay appropriate tax accordingly. Since April, public sector bodies have been forced to assume responsibility for deciding the IR35 status of such individuals and if inside IR35 they must pay the individual via PAYE so that they are taxed at source. Sounds simple doesn’t it but the new reforms have proved anything but simple in practice. Just days ago, one public service, Transport for London (TfL) reported that repairs to the Underground system were going to be delayed because a mass exodus of contractors has left TfL short of staff. That mass exodus is the result of IR35.

The story goes back to January when TfL issued a blanket ban on using individuals working through their personal service company, knee-jerking in haste and panic in reaction to HMRC’s new legislation. HMRC simply did not provide enough guidance to public-sector bodies regarding the changes, its online tool to establish the status of workers did not go live until days before the policy became law and so chaos ensued. Given that TfL engages in the region of 1400 PSCs, this timeframe was woefully inadequate to allow them the time to properly prepare for the changes, hence their blanket ban and subsequent u-turn. We also saw blanket bans (often followed by u-turns) by many other public-sector organisations which were simply taking a cautious approach for fear of getting employment status wrong and being penalised by HMRC. The impact at TfL is clear to see; George Osborne’s move to save money for the public purse is actually delaying improvements to rolling stock and delays to essential tube line repairs and improvements.


So what do HR departments need to know?

The changes make end-hirers of personal service companies (PSCs) responsible for determining IR35 status and the legislation considers how akin to an employee a contractor might be. If his or her working practices suggest that they might be a disguised employee then the contractor must make a deemed payment to HMRC roughly equivalent to the tax and NICs that would have been paid if that contractor was employed. The changes mean that HR and procurement departments in the public sector must now determine if each assignment is inside IR35 or more akin to employment and, if the latter, the end hirer must pay the contractor via PAYE and deduct tax and NICs at source just as they would for an employee.

HMRC has developed an online tool, called Checking Employment Status for Tax (CEST) which has been designed to help hirers to determine if an assignment falls inside or outside IR35 status. If the correct information is entered into the CEST tool then HMRC will effectively underwrite the guarantee of the result. Similar tools are also available from other sources and advisors, but it is only results generated from their own tool that HMRC guarantees. If an assignment is deemed as being inside IR35 the hiring firm can continue to engage individuals through their PSC provided they are paid via PAYE payroll.


This means that the invoice issued by the contractor is dealt with as follows:


– VAT is paid by the usual accounts payable route for invoices (if applicable)
– The invoice balance is paid via payroll from which employee NICs and PAYE need to be deducted
– Employers NIC will be an additional cost to be paid, legally these cannot be automatically deducted from the assignment rate so will need to   be factored in to the costs elsewhere
– Other payroll costs such as the apprenticeship levy should also be planned for.
– Payroll will need to collect personal data and issue payslips, P45s, P60s etc.
– Payments and reconciliations need to be undertaken by different departments (accounts payable and payroll) in order to pay the invoice.
– The contractor’s invoice is never paid in full, meaning that they have a debt held in their company


The legislation introduces a new “fee payer” status which puts the onus onto the firm that is paying the PSC to ensure that those caught by IR35 have the tax and NICs deducted at source via PAYE. The fee payer may not be the hiring company – if there is a recruitment agency in the supply chain then that agency or another intermediary will often be the fee payer. It is therefore very important for hirers to discuss IR35 responsibilities with their supply chain partners to be sure how the employment status will be implemented in practice. To get around the issue and to avoid the burdensome admin, some hirers are engaging individuals via an umbrella firm. Umbrella firms become a contractor’s employer providing them with all 84 statutory rights and benefits whilst enabling them to work for a number of end-clients.


My advice to HR teams would be to properly consider the working practices of each assignment on a case by case basis and avoid taking a wholesale approach which could unfairly penalise some contractors into paying too much tax. 23% of the UK’s workforce has chosen to work in non-permanent or contingent roles and these reforms are having a devastating impact on public sector services as the flexibility of this economically important workforce has been much reduced for all parties. It is little wonder that we are seeing Unions stepping up to defend their members as HMRC does not have an appeals process for anyone deemed to be wrongly inside IR35. This means that legal action is the only option for those who think that they have been unfairly treated and penalised. I just hope that HMRC acknowledges the impact that these reforms have had on the public sector and the public purse before they press on with their plans to roll out the reforms into the private sector. It is also worth noting that these changes would not have been necessary if HMRC had properly enforced the existing legislation rather than delegating this to hiring firms.



Author: Editor

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