IR35 Changes: Minor Breakthrough

IR35 Public Sector

I am pleased to finally bring a bit of good news for the recruitment sector. Whilst it is not the news many would have hoped for, it is somewhat of an IR35 breakthrough. Thanks to APSCo’s extensive lobbying the IR35 changes have altered course slightly.

In my last update: Recruitment Sector Shake Up: IR35 Changes a Reality, I stated that from April 2017 “agencies will be responsible for ensuring  that one man band companies, namely Personal Services Companies (PSCs), are paying the correct tax and NICs.” However in the draft legislation, released on Monday 5 December, it appears that HMRC has had a slight change of heart.

In the draft legislation it was announced that the end user, or public sector body, will be responsible for determining whether the PSC falls under IR35 or not:

“Public sector bodies will be responsible for determining whether or not the rules apply and will be required to share this information with agencies in order for them to operate the rules correctly.” (Overview of Legislation in draft)

Agencies remain responsible for deducting the correct employment taxes, but at least this change takes some of the pressure off with the public sector body being the one that ultimately decides whether IR35 applies.

APSCO’s response:

“While the draft legislation is pretty much as we expected in that it removes contractors from the scope of IR35 and makes this new legislation applicable instead, we are pleased that HMRC has, at least, taken on board APSCo’s lobbying arguments for a statutory obligation on the public sector client to make the determination to decide whether, if the worker was engaged directly s/he would be an employee for tax purposes, and that this information must notified to the intermediary. This is a really important point because in reality, for a recruitment firm to be able to start the process, they need to know how much they can pay the worker – and what models they can use.

“However, while HMRC has listened to APSCo, there is no time frame specified for the provision of this information. What the draft legislation does say is that the recruitment firm can request the determination if it is not received – and that the public sector client must provide it within 31 days. The recruitment firm can also raise queries on the decision but again the public sector client has 31 days to respond. The draft legislation does not pass the liability for the determination on to the public sector client unless they simply fail to provide the information after a request. The draft wording is in no way ideal but it does at least confirm the important underlying principle that the public sector client is the only party that can determine the status of an assignment”

It is good to see that some of the responsibility has shifted and will be shared more equally between the agency and public sector body. However, this will not change the outcome for PSCs and for the majority I still believe that they will be treated the same as employees, removing the tax advantage of operating under a PSC and inevitably leading to the extinction of them.

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