New guidance for public sector bodies on IR35

Decision-making responsibility moves away from the PSC. 

As detailed in our article in September 2016 In Practice magazine, the government has announced fundamental changes to the IR35/personal service company (PSC) rules affecting public sector bodies. The proposed changes impact from April 2017.

The crucial proposal is that the liability to make the determination about whether the intermediaries’ rules apply, and the associated tax liability if so, are moved from the PSC to the public sector end-client, agency or other third party closest in the chain to the PSC if there is one. Note that the rules will not change for PSCs contracted to work for clients in the private sector.

Therefore, where it is deemed that the legislation applies, the public sector body, agency or other third party will be liable to pay any associated income tax and national insurance.

We have received reports that many local authorities, due to resource issues, are not able to apply the tests and as a safeguard are informing businesses that they will be paid net of tax. There is no appeal right within the legislation.

If you are affected you may wish to use the tool designed to help public sector bodies implement these changes. This is the new Employment Status Service (ESS). This is an online tool which replaces the Employment Status Indicator.

The service gives what is described as ‘the view’ of HMRC on whether:

  • the intermediaries legislation (known as IR35) applies to an engagement
  • a worker should pay tax through PAYE for an engagement.

The new tool is therefore available for all status queries, not just those that may be within the off-payroll working rules.

In addition, HMRC has launched a new help page providing guidance for PSCs/public sector bodies; interestingly, there is also guidance written specifically for agents where they act for clients affected by the new rules.