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IR35: Public sector changes - what is happening in practice?

27th Jul 2017
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Bhavina Carsane, consultant at Chartergate Legal Services, assesses the impact of the new IR35 Legislation on public sector contracts.

IR35 rules

On 6 April 2017, the IR35 rules as we knew them changed for contracts performed in the public sector. In March 2017 Matt Boddington examined how the new IR35 rules should operate for public sector workers.

Essentially, the IR35 test remains the same. This means that if an individual is providing services through their personal service company (PSC), and the circumstances are such that if the client directly engaged the individual, the individual would have been an employee or an office-holder of the client, then IR35 applies to that engagement.

Impact of the new rules

The changes to the legislation have resulted in much confusion throughout the public sector. This has resulted in the law being misunderstood by many intermediaries, which is concerning.

The previous position (and the remaining one for the private sector) was that the PSC was required to decide whether IR35 applied to the engagement or not and if it did, it was responsible for operating the deemed payment calculation at the end of the year.

The new public sector rules have in effect shifted the liability and the responsibility to comply with this legislation to the “fee-payer” (i.e. the person paying the PSC, which may be an agency or another intermediary depending on the contractual chain).

Fee-payer’s responsibility

It is now the fee-payer that is required to make the decision on the applicability of IR35 to the engagement. If IR35 does apply, then it is the fee-payer who is responsible for operating the deemed direct payment calculation to the payments it makes to the PSC (i.e. deducting tax and NIC under PAYE).

There are a number of ways in which a fee-payer can make a decision on the applicability of IR35. This includes obtaining legal advice, carrying out contract reviews and using online IR35 tests such as HMRC’s Employment Status Service (ESS) or the working arrangements may clearly fall outside the scope of IR35. Whilst this appears to be a straightforward change, the reality is much different.

Confusion in the chain

Agencies (and other intermediaries) are often not aware of the specific working arrangements between the individual and the end-client. Nevertheless, they are the party responsible for making the decision as the fee-payer. To add to this, there is much confusion surrounding the end-client’s conclusion about the engagement.

Role of PSB

The legislation has introduced a new provision whereby the public sector body (PSB), who is the end- client, is required to provide its conclusion on the applicability of IR35 to the engagement. The PSB is required to provide its conclusion to the person it contracts with, on or before the time the contract is entered into, or prior to the services being provided, if this is at a later date. It is also required to take reasonable care in coming to its conclusion; failure to do so will result in a transfer of the tax and NIC liability to the PSB.

The legislation does not provide the PSB’s conclusion with force of law; it is merely the PSB’s opinion and therefore is not binding on the person it is contracting with or indeed on any other party in the chain. In practice however, the opposite is occurring and the PSB’s conclusion is being treated as a binding decision which cannot be challenged.

There is a provision in the legislation which enables the person contracting with the PSB the option to ask that PSB questions about its conclusions concerning the engagement. If questions are asked, then the PSB must provide a response within 31 days. If it fails to do so, then the tax and NIC liability will shift to the PSB from the fee-payer.

What is happening in practice

The lack of knowledge, combined with the confusion and misunderstandings, has led to agencies accepting the PSB’s conclusion at face value, possibly even without any further questions being asked. This acceptance has led to the PSB’s decision being treated as binding or seen as a safe route being adopted by agencies.

We have also seen the PSB’s conclusion being communicated as a mandatory client requirement which must be followed in the contractual chain.

One obvious difficulty relates to the transfer of liability to the PSB. It must be remembered that liability can only be shifted to the PSB where they have concluded that a PSC falls outside the scope of IR35 and they have failed to take reasonable care in coming to that decision.

But there cannot be a liability for incorrectly concluding the PSC falls within the scope of IR35 (as there is no IR35 liability to transfer). Naturally, in an attempt to avoid liability, many PSBs have a compulsion to adopt the safer route and conclude that the PSCs they engage fall within the scope of IR35.

Whilst adopting the safe approach may satisfy HMRC’s aim of generating further revenue, it often fails to accord with the reality of the situation. There are PSCs whose working arrangements fall outside the scope of IR35, but the PSB has concluded that IR35 is applicable. Such PSCs in addition to being bamboozled with these changes are left without a formal right of appeal.

This is the case despite that fact that the consultation document on off-payroll working in the public sector stated that PSCs would have a right to appeal any tax and NIC liability.

Options for a PSC

The options available to a PSC are somewhat limited. The PSC has the option of requesting a decision from HMRC under Section 8(1)(m) of the Social Security Contributions (Transfer of Functions, Etc.) Act 1999. Anyone who has had dealings with HMRC will be aware that this is a time consuming process to say the least.

The other option is for the PSC to carry out its own assessments via contract reviews and/or completing online IR35 tests such as the ESS tool (the results of which will bind HMRC provided the information entered is accurate). The results of this can be utilised by the PSC when negotiating terms with its clients, which is likely to be an agency (or another intermediary in the contractual chain).


The provisions of the new IR35 legislation have created a structure which is skewed far away from reality, often leaving the PSC without a route to appeal or perhaps even a say in the tax treatment of their payments, which is preposterous.

Although these new IR35 rules currently only affect contracts in the public sector, it is anticipated that these changes will be rolled out in the private sector in the near future, it remains to be seen whether the dynamics of the legislation will change. 


Replies (6)

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By Vaughan Blake1
27th Jul 2017 16:15

Why are we surprised? This was always going to be the case. PSB decision makers are always going to take the simpler risk free route.

Thanks (1)
By T F
30th Jul 2017 10:22

"It is now the fee-payer that is required to make the decision on the applicability of IR35 to the engagement"

This is wrong. The PSB makes the decision, the fee payer must make the deduction.

"Agencies (and other intermediaries) are often not aware of the specific working arrangements between the individual and the end-client. Nevertheless, they are the party responsible for making the decision as the fee-payer"

Again, this is wrong - the agency or intermediary is NOT the party responsible for making the decision.

These are really basic things to get wrong in the article.

Thanks (0)
Replying to T F:
Nigel Harris
By Nigel Harris
30th Jul 2017 14:33

I think you're wrong on both counts. The body who pays the PSC has to make the final decision because they're the ones who have to decide whether to operate PAYE. As the article says, the PSB has to give its decision but it's not binding on the fee payer.

My experience to date is:
PSBs are saying that all workers are caught by IR35
Agencies are forcing workers to join umbrella companies because they don't want to operate PAYE. It's a mess!

Thanks (1)
Replying to nigel:
30th Jul 2017 18:46

Interesting discussion. My understanding was that the responsibility for operating PAYE sits with the fee payer, but that the responsibility for the decision is with the client.

Section 61T of the legislation makes it clear that the client has responsibility for making the determination before or on contract commencement. Perhaps it doesn't explicitly state that the fee payer has to comply with the client's decision, but, if that means they don't, it sounds more like a loophole than intention. It would be a brave agency that ignored the client's decision and did not deduct the taxes! The article is right in that they should be challenging the decision if they do not believe it to be correct.

This bit is definitely incorrect though

"If questions are asked, then the PSB must provide a response within 31 days. If it fails to do so, then the tax and NIC liability will shift to the PSB from the fee-payer."

The liability shifts the other way - fee-payer to PSB.

It sure is a mess though!

Thanks (1)
Replying to nigel:
03rd Aug 2017 17:48

Thanks Nigel, I agree with your comments.

It may well have made life simpler for all in the industry if the PSB’s decision was binding on the Fee-Payer but unfortunately the legislation does not provide for this. There is nothing explicit within section 61T or in any other part of the legislation which states that a person is obliged to operate PAYE based on the information provided by the PSB under section 61T.

In the majority of cases I have seen, the conclusions provided to agencies and other intermediaries are being followed, however where, say, a blanket conclusion has been provided by the PSB (or any other conclusion that the Fee-Payer does not agree with) the Fee-Payer can carry out their own due diligence (by say asking the PSB questions in relation to their conclusion) and ultimately come to a different decision (whether it is that IR35 does or does not apply).

Whilst there may be contractual, commercial or client service implications of ignoring the PSB’s conclusion, there are no statutory consequences under the IR35 legislation.

The most that can be said is that if a PSB informs a party that it has concluded that the legislation applies, that party disagrees and does not operate PAYE, and, on appeal, HMRC are successful in establishing that the legislation does indeed apply, the party failing to operate PAYE is more likely to be exposed to a penalty in relation to its failure to operate PAYE on the basis of carelessness or deliberate default.

At the end of the day it is the Fee-Payer’s responsibility so it is not surprising that Parliament have not removed their right to make the final decision.

I should also say here that the PSB only has an obligation to provide its conclusion to the party it is in contract with. If for any reason that party is not the Fee-Payer (e.g. if there is a secondary agency) then the Fee-Payer does not have the right in statute to receive the PSB’s conclusion let alone ask questions in relation to the conclusion!

One thing is for certain: the new legislation does certainly move away from simplification!

Thanks (0)
blue sheep
31st Jul 2017 10:11

An additional issue that we have found is that the agencies are deducting employers NI from the PSC which is clearly against the HMRC guidance.
Employers NI should be paid by the agency, and the agency should have negotiated a different rate to compensate for any extra expense on the contract.

Thanks (2)