IR35 and the Public Sector

Contractors working in the public sector through a personal service company (PSC), such as a limited company, are no longer able to determine their own IR35 status as of 6 April 2017.

HMRC passed legislation for off-payroll workers in the public sector to stop the tax avoidance of workers engaged through their own limited company, who would otherwise be working as a regular employee if not for their PSC arrangement.

If you work in the public sector through your own limited company, your public sector client is responsible for determining your IR35 status, and should take reasonable care in making the assessment.

If your client deems your assignment as being inside IR35, they must inform your recruitment agency or other third party body, who will then make the necessary tax and National Insurance deductions before making payment to your limited company. If you contract directly through the public sector body, the public sector body will make the deductions.

If your assignment is deemed to be inside IR35, you have some options:

• Continue working through your limited company – you could continue to contract in the public sector through your limited company, and accept the lower take home pay you will receive. You will also no longer be able to claim certain expenses.

• Negotiate a higher rate – adjusting your rate to make up for the loss in take home pay is an option, although an adjustment that your client will agree to might not make up for the loss.

• Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any Corporation Tax or dividend tax on top of paying income tax and employees NI, and you will receive employee benefits unavailable to you when contracting through a limited company. Find out more about switching to umbrella.

• Leave the public sector – as many contractors have chosen, you also have the option to leave the public sector for the private sector, where these rules to do not apply to the same extent. However, changes to off-payroll in the private sector will be coming into effect in April 2021. Click here for more information.

Please note that this is not an exhaustive list of your options, and you should consider speaking to an expert before making a big decision. Contact us to discuss your options.

Your public sector client should take reasonable care when deciding whether IR35 applies to your assignment, as the legislation states.

There are a few ways for your client to determine your tax status:

• Internal processes: your client may use their own internal processes to assess your tax status. However, this is how certain organisations have come to blanket-assess all their PSC contractors as ‘inside IR35’.
• HMRC’s ESS Tool: HMRC issued an ‘Employment Status Service’ tool, or ESS tool, that goes through a checklist in a series of questions based on the assignment that will come out with three possible answers: ‘intermediaries legislation does not apply’, ‘engagement should be classed as employed for tax purposes’, or ‘unable to determine the tax status of this arrangement’.

• Tax status specialist: Your client may use a tax status specialist to assess your tax status based on your contract terms and working practices.

You and your agency should keep a copy of documentation proving the results of your contract’s IR35 assessment for future reference. There is no provision for appealing an IR35 status decision, and some contracts could come with the IR35 status pre-determined. See the previous section for information on what to do if you are deemed inside IR35.

Contact us to discuss your payroll options in the public sector