IR35 changes relating to the public sector

From April 2017, the rules for individuals providing services to the public sector via an intermediary such as a personal service company (PSC) will change.The new rules will shift the responsibility, for deciding whether the intermediaries’ legislation known as IR35 applies, from the intermediary itself to the public sector receiving the service.It has been confirmed as part of the Budget measures that the necessary legislation for this change will be introduced as part of Finance Bill 2017.

HMRC recently published new guidance to help public authorities, employment agencies, and other third parties who supply labour to identify if the contracts they have are within the scope of the changes. The new provisions will apply when a worker personally performs services or is under an obligation to personally perform services for a public sector client. In addition, the worker must be providing the services via an intermediary (usually a PSC) and the services must be such that if the contract had been directly with the client, the worker would be regarded for Income Tax purposes as an employee of the client.

The new rules will also bring managed service company (MSC) within the scope of the new rules if all the conditions outlined above apply. The 5% flat rate allowance that currently applies to PSCs to reflect the administrative cost of maintaining this structure will be removed when working with the public sector.

There are a number of scenarios that fall outside the scope of the reforms. For example, there is separate guidance where an agency directly employs a worker supplied to the public sector and PAYE and NIC is deducted. The rules will also not apply where a public authority has fully contracted out services to a service provider and the workers do not personally provide their services to the client.

These changes are predicted to mark a profound change to the way agency services are provided across the public sector especially in the NHS, local councils, education establishments and the police. There are concerns that many agency staff will move away from supplying services to the public sector and instead work in the private sector where the changes do not apply.

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