Full steam ahead

Government confirm commitment to IR35 reforms in public sector

The consultation document, ‘Off-payroll working in the public sector: reform of the intermediaries legislation’ is due to close on 18th August but the Government have made it clear that their proposed reforms will go ahead in April 2017 as planned.

The proposals

From April 2017, where a PSC is engaged by a public sector body then it will be the responsibility of either that public sector organisation, agency or other third party paying the PSC to assess and apply the IR35 rules and also to deduct and pay over to HMRC the necessary income tax and NIC. Where there are a number of agencies in the contractual chain then responsibility will rest with the agency that contracts directly with the PSC.

To enable an agency or public sector body to decide whether the IR35 rules apply to a contract HMRC will develop an online tool.

Any hopes that the Government may rethink their proposals were dashed when a statement in the Treasury Minutes from last month confirmed that the new tax rules announced at Budget 2016 will apply. In the interim, the Treasury is to consider whether its current public sector guidelines for ‘off-payroll’ limited company workers need amending.

Public Accounts Committee (PAC) recommendations

In April of this year the PAC published its report, ‘Use of consultants and temporary staff’ which revealed that the main 17 Government departments and their agencies, in 2014-15, paid permanent staff salaries totalling £17 billion and consultants/temporary staff between £1 – 1.3 billion. Contractors fulfil anything from highly specialist roles through to providing cover during peaks in demand for less skilled work. Consultants and temporary staff are sometimes used to fill gaps in the skills of the civil service.

Following the report the Government has accepted a number of the Committee’s recommendations:

• By December 2016, all Government Departments should produce a strategic workforce plan that covers their entire group for the next five years, identifying ‘skills gaps’ and other resource needs and how they will be filled (including by consultants and temporary staff). In March 2017, the Cabinet Office should provide the PAC with an update, naming those departments still lagging behind.
• By autumn 2016, all departments should have established regular reviews of the need for temporary staff across their whole group, the time in post and the progress made in filling more of these posts with permanent staff.
• The Treasury should re-evaluate its guidelines to departments in the light of the recent Budget announcement. It should also require that departments immediately review whether their off-payroll staff should be on PAYE and, after April 2017, that departments review the calculation of tax for a sample of any temporary staff who continue to be contracted as a company.

Online tool

A new digital tool for determining a contractor’s employment status is being developed with a beta version due for release in the autumn. According to HMRC this will be different to the current Employment Status Indicator (ESI) that is used by the construction industry. To assist with its development HMRC will be asking stakeholders what questions should feed into the tool, over the summer.

The consultation document however confirms that the online tool will only be used where the engager is unable to answer ‘yes’ to two questions:

1. Is the worker required to do the work themselves?
2. Does the engager decide or have the right to decide how the work should be done?

Answering ‘yes’ to both questions places the contract firmly inside IR35. Just how many contractors will get past this first base when left to the devices of the agency and public sector organisation?

The online tool has received a fair amount of criticism but this can work provided HMRC get it right and that, I am afraid, is a very big IF.  It has to be developed properly and fairly, with sufficient weight given to the relevant status questions. There are some that believe the tool will feature on three areas, namely substitution, control and financial risk.

Given that the beta version is yet to be rolled out, will the tool be properly developed in time for next April or will it be hastily rushed?  

Many commentators think that the online tool is a curtain raiser to it being used in all IR35 circumstances, public and private sector alike, an opinion that I very much share. If so, then it is absolutely paramount that this mechanism is accurate, reliable and fair. Are these elements that are synonymous with HMRC? I don’t think so!

The consultation document can be downloaded below.

Off-payroll working in the public sector: reform of the intermediaries legislation