Individuals who currently work for a public sector body via their own company or other intermediary, are potentially within IR35 if, ignoring the intermediary they would be workers of the public sector body. Under existing rules the income tax/NICs risk remains with the intermediary who is responsible for deciding whether IR35 applies.
As previously announced, with effect for contracts entered into or payments made, on or after 6 April 2017, the responsibility for deciding whether IR35 applies is transferred to the public sector engaging entity. The specific changes are as follows:
- the public sector engager or agency is treated as an employer for the purposes of taxes and Class 1 NICs;
- the amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income, or of earnings for Class 1 NICs for that worker;
- the public sector engager or the agency is liable for secondary Class 1 NICs and must deduct tax and NICs from the payments they make to the intermediary in respect of the services of the worker;
- the public sector is defined using the definitions in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Acts;
the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using Real Time Information.
Contractors working within the public sector should be reviewing their contractual and working arrangements to gauge whether they are potentially caught within these new rules.
In most case the public sector body will want assurances that intermediaries are outside IR35. Agencies may also be exposed where they act as fee payers to workers even where the public sector incorrectly categorises a worker. They will need to closely engage with public sector entities, in this regard, to ensure they are compliant.