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IR 35 consultation

IR 35 consultation

HMRC have recently published a consultation document on the intermediaries legislation commonly known as IR 35.


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At the end of May HMRC published their consultation entitled ‘Off-Payroll working in the public sector: reform of the intermediaries legislation’. The Government has stated that “the rules (on how IR 35 operates) will remain unchanged in the private sector” but many are speculating that these proposals could be the thin end of the wedge and that, if implemented for the public sector, it will only be a matter of time until they are extended to the private sector. The proposals could have profound implications for how workers are engaged. The consultation runs until 18 August 2016 and HMRC welcome submissions.

The proposals
No changes are proposed to the rules which are applied to determine whether a worker would have been an employee if engaged directly.

Rather, the core proposal is to move the responsibility to determine whether IR 35 applies, and the associated tax liability if so, from the Personal Service Company (PSC) to the public sector end-client or agency or other third party closest (see below) in the chain to the PSC if there is one.

The definition of public sector includes the NHS, BBC, etc. but does not include private companies who carry out public functions for the state e.g. does not include a private healthcare company running a care centre at a hospital.

Third parties providing workers to the public sector
Third parties in this case are employment agencies etc. Where a third party is providing the worker to a public sector, it is proposed that the third party will be required to take responsibility for determining whether IR 35 applies and become liable for the tax if so.

Where there are several agencies in the supply chain the proposals will apply to the UK resident third party closest to the PSC. If there is no UK resident third party then the provisions default back to the public sector engager.

Working out the tax
If IR 35 is determined to apply then the third party or public sector engager (as appropriate) must account by deduction for the tax and NIC through the Real Time Information (RTI) system and pay Employers’ NIC.

New Online Tool
A two stage process is proposed:

Stage One
The gateway test:

  • The engager is a public organisation;
  • Less than 20 percent of the contract relates to materials; and
  • Services are provided via the worker's own company or PSC.

If all three statements apply, the engaging entity must move to Stage Two.

Stage Two
If the answer to both questions below is yes, tax and National Insurance on payments to the PSC will have to be accounted for:

  • Is the worker required to do the work themselves?; and
  • Does the engager decide or have the right to decide how the work should be done?

If the answer to either or both of the Stage 2 questions is no, then HMRC's online digital tool (see below) will be used to determine whether a withholding obligation exists.

HMRC have promised an online tool “to provide upfront certainty”; it is in development.

Transfer of the tax liability
HMRC are considering who they should be able to collect tax and NIC from in cases of non-compliance. The options presented are as follows:

  • Jointly and severally on the engager and the PSC;
  • On the engager alone - if the engager makes a wrong decision then that engager may be liable; and
  • On the director of the PSC/the individual worker/the PSC itself if the PSC or worker fraudulently gives incorrect information.

The consultation document can be found here.


For further information please contact :

Michael Lavan

Caroline Laffey

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