The impact of IR35 changes on contractors in the public sector

IR35 impacts on public sector


IR35 is the short name used for the ‘intermediaries legislation’, introduced in 2000 with the aim of countering tax avoidance and specifically aimed at the limited company contractors that organisations hire. It is designed to combat ‘disguised employees’ – which HMRC believes would be employees of the client if they did not work through a limited company.

New legislation introduced for the public sector on April 6th 2017 moved the onus of evaluating IR35 tax status from the worker’s own company to the public sector body hiring the worker and they (or the agency if there is one) are now liable for collecting taxes and ensuring compliance.

Public sector reforms – the fallout

One week on, the fallout has not been pretty. We have seen locum doctors not turning up for their shifts, nurses not knowing whether they should turn up for their shifts and even IT contractors working on HMRC’s own projects abandoning those projects in droves having been deemed by HMRC to now be caught by IR35.

HMRC released an online tool just days before April 6th, which had undergone testing and been shown not to give the same results as the IR35 court cases. With the trust lost in its tool and the lateness to market, public sector bodies have (contrary to the new legislation) been making blanket decisions which is causing considerable chaos in the public sector.

HMRC has been terribly naive

HMRC was terribly naïve to think that contractors were going to blindly accept these new conditions and ignored all the warnings. Why did HMRC think that contractors would accept having the same amount of tax deducted as employees without any of the statutory benefits? No contractor would agree to work like this.

The whole point of temporary working is that it is just that. There is no obligation on either party. They are used on an on-demand basis. If you want people to be available when you want them, then you need to hire them as employees and provide them with all the rights and benefits that come with employee status.

New hiring risks for public sector bodies

Public sector hiring organisations are already seeing demands of around 25% for contract rate increases just to keep their contractors and all will need to prepare for potential claims from contractors for employment and workers’ rights. This is because it is exactly the same case law rules for determining someone as inside IR35 as it is for them being considered an employee.

The main reaction by contractors who can work in the private sector is that they are abandoning the public sector. This is having a significant effect on key government projects.

The main routes we are seeing for contractors are:

  • Contractors forced inside IR35 are increasing their rates by 20%-25%
  • Some will claim workers’ rights via the Agency Workers Regulations (AWR)
  • Others on longer term projects will consider Employment Appeals Tribunal to either claim full rights or disprove the evaluation
  • Many simply leaving for more lucrative private sector contracts

10 tips for public sector contractors – avoid it if you can!

Avoid the sector: If you can get work in the private sector, then do so because the public sector is in disarray and chances are any contract you consider could become subject to these blanket type decisions, meaning that although you should be outside IR35 you may not be able to work that way. The dust should eventually settle and firms should start engaging people properly if they are outside IR35, but for now they don’t appear to be. So just avoid the sector if you can.

Avoid blanket decisions: If you have to work in the sector, then pay careful attention to which public sector body you consider working for and check to see if they are taking reasonable care to evaluate status on a case-by-case basis. Avoid ones making blanket determinations.

Calculate new rates: Use the IR35Calculator to work out your rates so that you can quote two rates: one for outside IR35 work, and one for inside IR35 work.

Ask early: As early as possible in any contract process, try to understand if the contract has already been judged as inside or outside IR35. Ask the agency or client and ascertain how they are currently assessing status.

Get a free IR35 review: Use IR35Testing to obtain a free IR35 Review prior to the contract starting.

Ignore promises: NEVER start a contract based on the promise of it being judged outside IR35 at a later date. Always get an agreement first and in writing. Don’t turn up without it.

Expect reasonable care: If you encounter blanket rules and disagree with the decision, remind the public sector body that it has a duty to use reasonable care in making the decision, and ask them to tell you how they reached the decision that any contract is inside IR35.

Keep evidence: Keep all evidence of any decisions. You may need to refer to it if HMRC investigates.

Only use companies for outside IR35 work: If you have to work as inside IR35 then don’t do so through your limited company. It’s far too messy. Keep your limited company only for outside IR35.

Use reputable umbrella companies: Only use umbrella companies that are full members of FCSA.

Private sector contractors

Experts are predicting that HMRC will roll these changes out to the private sector. And the expectation is that this will be sooner rather than later which could happen as soon as 6th April 2018. So, any new 12-month contract you sign now could become subject to these changes. You need to seriously start thinking about your IR35 status for any contracts that you start now and which will span April 2018. Start testing the status of your contracts use IR35Testing to get a free IR35 review result and only consider working for clients that will engage you on a project basis. Steer clear of role-based work and be very diligent not to get caught up in any blanket approach used by clients who are unprepared. You may even have to educate your client about IR35.

Public sector bodies and agencies were unprepared and the knee jerk reaction has been to use blanket “inside-IR35” approaches. This meant contractors who could leave have left the public sector but, when it comes to the private sector, you may have nowhere left to run.

*Dave Chaplin is CEO and founder of Contractor Calculator, an online resource for freelancers and contractors and also author of the recently published Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients. It is available on Kindle at £9.99: and in Paperback at £14.99: 

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