IR35 legislation and its impact on public bodies

Unless public-sector organisations can find a workaround, the talent pool will dry up

Changes to IR35 legislation, which came into effect in April 2017, are causing a great deal of uncertainty for public bodies and their contractors – who, for tax-efficiency purposes, are operating as Personal Service Companies (PSCs). Where previously the contractor was responsible for ensuring compliance with the legislation – and liable for any unpaid tax and additional penalties for failure to comply – HMRC has flipped this on its head. The burden of compliance and liability has been placed firmly at the door of the employing public body or third-party agency. Without the resources to ‘test’ every supplier, some organisations have, in many cases unfairly, placed a blanket IR35 determination on all their PSC contractors. By putting all of them inside IR35, they have mitigated their exposure to risk, but alienated their contractors, who have seen their real-world earnings drop significantly.

This is a cause for concern with regard to the supply of talent in the public sector. As Contractor UK reported: ’30 contractors abandoned a health service IT project after an NHS trust said it would declare them all inside IR35 from 6 April 2017.’ It also notes that other trusts have been forced to raise the rates they pay to keep their PSC suppliers. Whilst highlighting the problems within the NHS, in particular – as locums, agency and bank staff are leaving lured by private firms – the article (31 May, 2017) goes on to quote Dave Chaplin, chief exec of ContractorCalculator, who said that: “Many public sector firms have discovered that blanket rules have had a hugely negative impact and highly skilled contractors have been leaving the public sector in droves.”

For the uninitiated, PSCs are usually set up in a way where the sole director pays themselves a small salary (usually no more than the tax free personal allowance) and receives most of his or her remuneration through dividends, which reduce an individual’s tax liability and are not subject to national insurance contributions. HMRC has clearly taken the view that the majority of these kind of arrangements are purely a ruse to avoid paying tax.

Many public-sector organisations are new to IR35 and are simply not set up to deal with its demands. As a result, the tax liability risk of the legislation is encouraging risk-averse behaviour, with the consequences outlined above. The new rules will require public bodies to review all ongoing and future contracts to identify those that could be caught under IR35. However, most public bodies do not have the time or resources to carry out the necessary HMRC Business Entity Test. If the engagement has the nature of a contract of employment, the public sector organisation will need to obtain all necessary personal, company and tax information needed from the PSC to enable them to account for and pay any liabilities due.

After a significant amount of lobbying against the change – by public-sector organisations and their PSC contractors – prior to and since the new rules have been introduced, it is clear that HMRC is not going to back-track any time soon. In fact, talk on the street is, it plans to roll it out into the private sector, too. As such, public bodies need to find a productive way of working within the new legislation that doesn’t put extra strain on precious resources, mitigates their exposure to risk and doesn’t harm the supply chain of high-quality talent.

So what’s the answer?

Having consulted with a number of large public bodies, Seymour John Public Services has developed a range of options to support our clients in interpreting and complying with IR35, mitigating risk and giving them piece of mind with the minimum of disruption.

We have also developed a bespoke model that is now being uitilised by a number of public bodies. It has enabled them to retain talent and ensure services continue as usual without any disruption; whilst their contractors have the assurance they can operate within the public sector without the worry of the new rules impacting them. It is a model that will also operate effectively for the private sector should HMRC decide to apply the rule changes in this arena, too.

As an approved supplier under the Crown Commercial Services consultancy framework you are able to utilise this initiative through an OJEU-approved route.

If IR35 compliance is an issue affecting your organisation, please feel free to speak to John Lavictoire, Director of Seymour John Public Services, who, as a public-service specialist, has made it his mission to help organisations make sense of the new rules.

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