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IR35: Updated legislation for public sector workers

27th Mar 2017
Managing director Chartergates
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Matt Boddington, director of Chartergate Legal Services, reviews the latest draft of the IR35 legislation which will have a significant impact on the way PSCs operate in the public sector from 6 April.

Story so far

Our two previous articles examined the Employment Status Service tool, and the HMRC guidance for off-payroll working in the public sector. Schedule 1 to the Finance Bill 2017 contains the latest draft of the legislation, including a few changes and new provisions.

End-client decision

The end-client (the public body) has a duty to provide a view on the applicability of IR35 to the worker. This view must be communicated before the contract is agreed, or, if later, before the services under the contract start. There is also a positive duty on the end-client to take “reasonable care” in reaching its conclusion about whether or not IR35 applies.

One problem with having to make an early decision before the contract is even signed, is there is little opportunity to consider many of the factors that can be relevant to the IR35 determination. These factors include; whether the contractor is operating in business on their own account, which case law has established (and even HMRC concede) are an important part of the status test.

Failure to meet either of these requirements shifts the tax liability and reporting responsibility, including any employer’s National Insurance, on to the end-client.

Questions on decision

The end-client must also answer written questions raised about the decision it has reached within 31 days of receipt of those questions. Again, failure to comply with this deadline shifts the liability from the agency (or other fee-payer) directly on to the end-user.

I mischievously note that the legislation does not place any limit on the number of questions that an agency can pose to the end-client, nor the extent of them – nor indeed how many times such a written request can be made. Failure by the end-client to respond in writing to such questions within 31 days results in the end-client bearing the PAYE responsibility.

A savvy agency might bombard an end-client with employment status questions (much like HMRC do!) in the hope that a response isn’t forthcoming and the PAYE responsibility is shifted. Conversely (and equally mischievously) the legislation doesn’t actually say the end-client must answer the questions – it merely has to respond. A two-word response would technically suffice.

Unintended consequences

These changes are welcome, but there is an obvious issue here. While there could be liability passed to the end-client for incorrectly and unreasonably concluding that IR35 does not apply, there can be no liability for incorrectly concluding that IR35 does apply, as there is no IR35 liability to transfer in a case where IR35 does not apply.

This will inevitably lead to the safe approach of end-clients concluding that all PSC contractors are caught, so as to avoid any potential liabilities under the new debt transfer rules. This will be unhelpful to agencies trying to recruit PSCs in the public sector.

Implications for agencies

There is also now a positive obligation on the worker (not the PSC) to inform the person paying the PSC whether the IR35 conditions of liability apply. For a limited company this means whether or not the worker has a “material interest” in the company (generally holding 5% or more of the shares). If the worker does not explicitly inform the agency that the conditions of liability are not met, the agency has to assume that they are.

This has potentially huge implications for any agency paying any intermediary, whether it is a PSC, an umbrella company or any other form of intermediary. It is often assumed that IR35 is targeted at one-person service companies, but technically the rules can apply to any intermediary, including an umbrella company.

The reason IR35 does not apply to umbrella company workers is typically because the worker does not have a material interest in the umbrella company and/or because the worker is drawing all remuneration as salary under PAYE. However, the latter is irrelevant under the new rules, and the “material interest” test is deemed to be met unless the worker explicitly confirms otherwise to the fee-payer.

It remains to be seen whether this is just careless drafting, or whether HMRC will actually use this aspect of the legislation to seek PAYE from an agency under the IR35 deemed salary rules in a case whereby, say, an umbrella company supplying a public sector worker fails to meet its PAYE responsibilities.

New intermediaries

Anybody who had the bright idea of inserting another intermediary into the supply chain just to pay their PSC, so that they could avoid deductions being made will be foiled. Offshore entities and companies associated with the PSC are ignored when it comes to deciding who the fee-payer will be for the purposes of the new rules. 

Fraudulent documents

The debt transfer provision remains as per the original draft, with the added specific provision that a fraudulent written statement from the worker that the IR35 conditions of liability mentioned above are not met results in a transfer of IR35 responsibility directly to the PSC. Bizarrely, given the absence of any appeal provision, in a case whereby an end-client makes an incorrect blanket decision that IR35 applies, providing a deliberately incorrect document and taking the IR35 responsibility back onto its own shoulders might be a PSCs best option to avoid the unwarranted deduction of PAYE.

There are also some other technical changes to the way the IR35 “caught” payments are processed, the interaction with the managed service companies (MSC) legislation, and an exclusion for statutory auditors.


For more detail on these aspects see the Chartergates newsletter.

Replies (13)

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By sushi_ginger
27th Mar 2017 12:21

"a fraudulent written statement from the worker that the IR35 conditions of liability mentioned above are not met results in a transfer of IR35 responsibility directly to the PSC. Bizarrely, given the absence of any appeal provision, in a case whereby an end-client makes an incorrect blanket decision that IR35 applies, providing a deliberately incorrect document and taking the IR35 responsibility back onto its own shoulders might be a PSCs best option to avoid the unwarranted deduction of PAYE."

Brilliant. You couldn't make it up. What a dog's dinner.

As you were then...

Thanks (3)
Replying to sushi_ginger:
By G Grahame
29th Mar 2017 15:37

thanks for this, I was struggling to understand and thought "is it me?". Incidentally, I just rang the IR35 helpline when a result of the checklist came back as "unable to determine". I was cut off - twice. When I eventually spoke to someone, they told me I was cut off because they didn't have enough staff to cope with all the queries they were getting as a result of the new intermediaries legislation!! Perhaps they should contract out the service?!

Thanks (0)
By morgani
28th Mar 2017 09:45

We are finding this is all irrelevant. Pretty much all of our contractors working for PSB's have been told 'we won't work with contractors via their own limited companies after 1 April 2017'.
The agencies are feeding this info through to the 'contractors' and basically telling them you need to use this Umbrella company if you want to continue your work you have been doing. Some are offering a straight PAYE alternative.
Many of our clients are doing this as additional income and have decided they value their time more than the reduced rates so won't bother with the work anymore. Others are moving away from the PSB's and a couple will change to Umbrella/PAYE.
From my experience of our clients the government will not see an increased tax take. What they will see is even more of a shift of people away from PSB working and into the private sector.

Thanks (2)
Replying to morgani:
By DotasScandalDotOrg
28th Mar 2017 15:48

"From my experience of our clients the government will not see an increased tax take. What they will see is even more of a shift of people away from PSB working and into the private sector."

Which is why you'll see an *attempt* to roll this out into the private sector next, and sooner rather than later (you "level the playing field").
Rumor has it in contractor circles that HMRC is working "in secret" on such a project (

Thanks (0)
Replying to morgani:
By debrahuzzard
29th Mar 2017 12:04

as a spin off I have had two clients effectively sacked from the various schools they have been working for, told not to come back after the Easter break as they are no longer using any contractors and blaming this legislation. they were not PSCs but self employed music and art teachers. would have been much more honest to say the schools are dropping the arts due to funding cuts.

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By Vaughan Blake1
29th Mar 2017 09:26

On the basis that PSBs end up paying more Er's NIC and they receive funding from HMG, who is funded by the taxpayer, will this mean that the tax/Ni take increases, but so does the cost of the PSB by an equal amount?

Thanks (2)
Replying to Vaughan Blake1:
By iangrinyer
03rd Apr 2017 13:29

No, because in many cases where an agency is involved, it would appear the PSB is not paying the employers NI. It is coming out the contractors daily rate.

Thanks (0)
By pauljohnston
29th Mar 2017 11:23

Feedback I have had is that a large number are not renewing their contracts after 31 March 2017 unless the amount paid by the pSB is increased to take into account the additional deductions. It will therefore be interesting to see how the problem resolves itself.

HMRC could have done much better. IR35 has always been a challenge because in my view they deal with the perceived problem the wrong way round.

Thanks (0)
By towat
29th Mar 2017 14:34

"A two-word response would technically suffice."

With the second one being "off" presumably?

Thanks (0)
By dmmarler
03rd Apr 2017 10:55

Life would be so much simpler if NI were combined with tax, and all income was taxed equally, and all employers paid a notional employers' tax based on total payroll each month. Many people would want to be employed (as it gives them more rights), and they would still earn the same amount of money after tax whether they were employed or no. It would be cheaper for companies to pay the employment tax than fight cases through the employment courts, so all would be well in both the public and private sectors.

Thanks (0)
By chatman
03rd Apr 2017 12:19

I thought the reason may businesses insisted their contractors trade via limited companies was to avoid the risk of getting stuck with the PAYE. Now that is happening anyway, won't they all go back to using self-employed contractors? Or is it about avoiding employment rights?

Thanks (0)
By Tom 7000
05th Apr 2017 11:09

What I am experiencing
All the Government depts are doing is saying:
You are all employees, and we will run PAYE on all payments or you can have a direct zero hours contract and save yourself some admin.

The result is, as reported on sky news last night about locum doctors , that there is a huge pay cut.

The ones I know have been offered a 10% pay rise, go onto zero hours contracts and pick up holiday pay and other employee benefits and get money paid to pension under autoenrolement, so overall they are about level. Apparently the doctors are not as they have no alternative employer.... in the UK.

Tax Take
So HMRC get more paye but they then send it back to the departments to pay for the extra cost and all the money goes around in a circle.

The Future

BUT as has been highlighted on here they will expand this to the commercial sector next year. The result is that all contractors in savvy companies with FDs avoiding potential liabilites will be in the same boat, but probably with a pay cut as theres no more money available.

The result
90% of contractors will disappear ( the other 10% won't realise the rules have changed). Assuming there are 500,000 contractors in the UK theres 450,ooo less ltd companies being processed. An accountant can process maybe 100 clients a year so thats 4500 accountants with P45s.... down ward pressure on pay?

Some of the bigger agencies/ accountants where 95% of their work are consultants are going to close and all their admin support are out too.... 100 employees down to 2 partners a helper and a dog.

P45 Timeline
Assuming these come in 01/04/18 there will be the runoff through 18/19 of tying up the closure of all of the companies, so accountants P45s are set to be issued 31 January 19.

Savng Grace
We can live in hope that they introduce MTD for the year commencing 5/4/19 then the spare resources can go skiing in February and March 19 and on their return be reallocated from completing company accounts to dealing with bookkeeping for the self employed.

Mind you under MTD they will all bring their stuff in to be processed 10th July 19 for submission by 31st. So you will have no work for 3 months then an Everest to do in 2 weeks, need to think about monthly processing here somehow to remove peaks and troughs. Pity you can't stagger it like VAT returns that would be handy.

Not the same technically demanding work for all the ACCA ACA CA etc , but it gives the redundant accountants something to do....till they get bored .....

Apart from that, hows your day?

Happy New Year


Thanks (0)
Replying to Tom 7000:
By sawebs
05th Apr 2017 20:00

I disagree. The private sector won't take this #### like the public sector. They will make the effort to assess all contracts properly and if any are inside they will change the contract and working arrangements to make them outside. They will coach managers to know what to say if HMRC start asking questions. The private sector is smart and resourceful unlike the public sector. They could also insist on an indemnity clause to ensure contractors pay any tax and penalties, perhaps insisting contractors have insurance. This will effectively put us back to where we started. All that investment from HMRC wasted, while the NHS etc continue to pay more for contractors than before.

Trebles all round numpties.

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