Public Sector IR35

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Public sector bodies paying limited companies for workers now have to assess whether IR35 rules apply to that company.  If so then payments made on or after 6 April 2017 (regardless of invoice date) will have PAYE and NI deducted by the public sector body (or by the agency if they use one).  The payment will be on a payslip in the name of the individual worker, even though it is a company providing the services.

From 6 April 2017 public sector bodies will have to decide whether workers providing services through limited companies (contractors) are subject to IR35.  Previously this has always been the responsibility of the limited company.  This was first announced in the 2016 Spring Budget.

IR35 (the Intermediaries Legislation) requires personal service companies (usually a single person company) to pay the director a salary of at least 95% of the IR35 income.  IR35 applies to income which would be employment income were it not for the personal service company sitting between the worker and the client.  This is how IR35 has worked for many years and there is no change to those rules.

For payments made by public sector bodies on or after 6 April 2017, even if paying invoices from before that date, additional rules will be introduced.  Public sector bodies include HMRC, NHS, local councils, Transport For London, BBC, Channel 4 etc.  These public sector bodies will have to decide themselves if you would be subject to IR35, i.e. would you be their employee if it wasn’t for your company in between?

A late amendment to the rules requires the public sector body to take reasonable care in making this decision.  This means they must not make a blanket decision but must assess each a case.

HMRC have published an employment status tool.  Some organisations have tested this tool against known actual cases and have reported that the tool often comes out with the wrong answer.  In other words if the HMRC employment status tool says IR35 applies, the courts may still disagree.

If the public sector body decides your income falls under IR35, they must pay you as an individual through payroll with full PAYE and National Insurance deductions.

These rules apply whether the public sector body pays your company directly or via an agency.  If paying via an agency it is still the public sector body who decides whether IR35 applies, but it will be the agency that has to apply the new rule and deduct PAYE and NI from payments for your work.

Payments made under these arrangements will be statutorily deemed as belonging to the individual worker and not to the company.  This will override the contractual position of the company providing the services and earning the money.  In other words the money earned from the public sector body, if they consider IR35 applies, will be paid just the same as if your company did not exist – simply paid through payroll to the individual doing the work.

Employers National Insurance is added to the amount earned at a rate of 13.8%.  This will be an additional cost of the public sector body.  They may therefore try to negotiate a reduction in pay rate for the work.

As with all of our tax tips and web pages this information is necessarily summarised and of a general nature.  If you would like detailed specific advice please contact us.