Autumn Statement 2016: Reform of IR35 for public sector workers

Individuals who provide personal services to bodies within the public sector via intermediaries such as a personal service company, may be subject to income tax and NIC under IR35 if the income would have been treated as employment income if the worker had contracted directly with the body itself. The responsibility to account for any tax and NIC (deemed payment) under IR35 falls on the intermediary. In calculating the deemed payment, the intermediary can reduce the amount by 5% of all payments received.

The Government has confirmed that the proposed reforms to IR35, announced previously via consultation, in respect of workers operating in the public sector will go ahead from April 2017. Fundamentally, the responsibility for reviewing whether IR35 applies and paying the correct tax and NIC, will be moved to the public sector body. Furthermore, as these changes remove the administrative burden of deciding whether IR35 applies, the 5% tax-free allowance will be removed.

This is not an unsurprising announcement given the Government’s commitment to maintain and improve IR35 but it will be disappointing to those to lobbied hard for a withdrawal of the changes. The reform will mean that many public sector bodies are more likely to take the less risky approach and simply treat all workers operating via intermediaries as if they were employees.