Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation YouTube
Markel Tax

01 Jun 2016

Consultation: IR35 in Public Sector

HMRC have released the next document in the consultation process on the reform of “off-payroll” working in the public sector.  This is the consultation document itself.  It should be read by anyone who provides services to that sector through a personal service company [PSC] or by anyone operating an agency or other intermediary who subcontract work within the sector to a PSC. 

Questions raised

It raises a list of 15 questions covering aspects of the operation of the proposed new rules.  These cover:
  • Definition of the public sector
  • Obtaining Information
  • How to deal with the 5% deduction in the deemed calculation
  • How to decide if the new rules should be applied
  • Transfer of liability rules
  • Possible unexpected costs arising

The proposals

The proposed rules will apply to services provided through personal service companies (PSCs) either directly or via a second intermediary such as an employment agency or outsourcing company. As expected it includes an obligation for the engager of the PSC’s services to deduct tax and NIC from payments made to the intermediary. This will be done by adding the individual who provides the service the engager’s payroll. There are proposals for debt transfer rules but this was not entirely unexpected as it has been a common feature of previous legislation on intermediaries. 

As always the document needs to be read carefully as there are a number of underlying assumptions and definitions that indicate how the government is thinking. For example:
“………… evidence shows there is widespread non-compliance with the intermediaries legislation. The government estimates only one in ten PSCs who should be operating the rules on at least part of their income are doing so.”  [page 7]
“Most respondents to the discussion paper agreed non-compliance with the rules is widespread.”  [page 8]
These are probably intended as evidence for the need to reform the system but come without any solid statistical support.  This is contrary to our experience of the operation of PSCs under current case law derived rules.  

The public sector IR35 test 

The consultation document states that the new rules will not make any changes to the basis of the test to be applied as it will use the existing factors.  Specifically a supervision, direction or control (SDC) test will not be introduced.  This is shown in the following quote:
“The basis on which the rules are applied to determine whether a worker would have been an employee if engaged directly is not changing.”  [page 11]
The current law asks
“if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.” [Section 50(c) ITEPA 2003]
That test would apply case law decisions on employment status.  These consider the fundamental factors required to show employment exists.  These are:
  • the existence of an obligation to provide personal service, 
  • the existence of control over how the services are provided, and,
  • Mutuality of obligations [MOO].
While there are also a number of secondary factors which may be considered although these normally only come into play if the decision cannot be made using the three fundamental factors.  So we should expect the new rules to follow those precedents.  However, the new rules as shown at diagram 4 on page 26 will only consider personal service and control!
The full test uses a two part mechanism, with the first part simply looking at the nature of the entity providing the test with some aspects of the service also being considered.  This isn’t too controversial and should be reasonably easy to apply.  It is intended to prevent the rules being applied beyond the public sector and to businesses which are not regarded as PSCs.  A flow chart is provided at pages 24 and 25 laying out the issues to be considered.
The proposed new rules will move the liability to make the determination, from the PSC to the public sector end-client, agency or other third party as applicable.  This was expected from the initial announcements.  It is also made clear that:
“Where there is more than one agency in the contractual chain, the legislation will apply to the agency that contracts directly with the PSC.”  [page 13]
There will be a requirement for the PSC to report details of the individual providing services to the public body or agency required to operate PAYE if the arrangements are caught by IR35.
As previously announced there is to be a new HMRC status tool for determining if IR35 applies.  What is of concern is that the consultation questions do not include any that ask for opinions on the factors being used in that test so there is no question where respondents can raise the lack of MOO is being dropped as a determining factor .  There is also nothing to make clear if the existing ability to use specialist third party opinions will continue or if they will be acceptable as evidence in any appeals.

Other points of interest

There are a couple of things in the document which while not directly dealing with the new rules are worth passing mention.  Under changes to IR35 made last year office holders providing services through a PSC are automatically caught by the existing rules.  While there is no clear legal definition of an office holder or an office it is generally taken that an office is a position which exists independently from the existence of an individual currently holding the position.  The consultation sneaks in a definition that isn’t in line with this accepted usage stating that:
“An office holder is a person who has been appointed to a position by an organisation but doesn’t have a contract or receive regular payment, such as registered company secretaries, crown appointments, club treasurers, trustees and members of the clergy.” [Footnote – page 8]
Although the examples given are recognisably “offices” the first part of the definition is not in keeping with the accepted usage.
The other interesting quote states that:
“……….it would be relatively simple to avoid the effect of this change by restructuring contracts to be about service provision rather than a supply of a worker.”  [page 13].
This appears to be a slanted reference to the interpretation of the last set of intermediary rules at s44 ITEPA where the phrasing appears to allow the rules to be ignored where the contract is for a service rather than the provision of labour.
The consultation document can be found at:
Tagged IR35
Next article in series

01 Apr 2016

Travel and subsistence expenses

Strategic partners

  • Tolleys
  • Institute of Financial Accountants
  • BTC Software
  • Lovell Consulting