New IR35 rules even tougher than expected

Last minute changes to the revised intermediaries rules mean public authorities must review existing arrangements prior to 6 April.

The latest draft of the Finance Bill 2017, published on 20 March, includes some significant changes to the new off-payroll working rules, which reform the intermediaries (IR35) rules as they apply to public authorities. They are set to take effect on 6 April 2017.

For these purposes public authorities comprise institutions subject to the Freedom of Information Act – so not just central government, the NHS and local government but a wider range of organisations including many Universities.

Under these new rules, whenever an individual provides services to an end client which is a public authority through a personal service company (PSC) ,either directly or via an agency, the public authority will be responsible for deciding whether or not an engagement falls within the scope of IR35. The public authority has an obligation to inform the party it is contracting with (the PSC or agency, as applicable) of its decision.

The latest draft of the legislation places much stricter obligations on public authorities when making and communicating their employment status decisions to the PSC or agency, as follows:

• For contracts entered into on or after 6 April 2017, the public authority must communicate its employment status decision on or before the contract is entered into (or, if the services under the contract will begin to be performed at a later time, before that later time). 
• For contracts entered into before 6 April 2017, the public authority must communicate its employment status decision on or before the date the first payment is made under the contract on or after 6 April 2017. 
• The public authority must, on a written request by the PSC or agency, provide a written response to any questions raised about its reasons for reaching the employment status decision within 31 days of receipt of the request. 
• The public authority must take reasonable care when making its employment status decision.

Failure to do any of the above will lead to the public authority becoming responsible for operating PAYE and paying NICs in respect of the engagement. This will be a particular concern where the PSC is being engaged through an agency, in which case the agency would otherwise be liable to operate PAYE and pay NICs.

The second requirement set out above makes it even more important for public authorities to review their existing arrangements with contractors in advance of 6 April and ensure that they make and communicate their decision about whether they are within the scope of IR35 before making any further payments after this date.

We recommend using HMRC’s online Employment Status tool, which has been designed to help public authorities to determine the correct tax treatment of their contractors. It is advisable to keep a copy of the results provided by the tool as evidence that reasonable care has been taking in reaching the employment status decision.