IR35 public sector reforms: an overview of draft legislation

IR35 public sector reforms: an overview of draft legislation

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So it’s done: the UK government has decided that the reform of the off-payroll rules is ‘needed’ indeed. It was during the Budget 2016 in March that the government announced that the rules would be reformed in the public sector. Finally after a 9-month long consultation on the same, some very strong decisions have been taken.

1. The shift of responsibility to determine the employment status

It’s now the responsibility of recruitment agencies to determine whether or not a contractor is operating inside or outside IR35. The step has been taken to ensure that public funds are not misused and that those in receipt of them are properly paying taxes under the off-payroll assurance processes introduced by HM Treasury in 2012. The agencies will now be responsible for applying the rules and be held liable for paying any associated tax and NICs to HMRC – but this is just to be applied in the public sector for now.

2. The online tool will be introduced by April 2017

There has been no change in the timeline. But it’s confirmed by the government. The Prime Minister has asked Matthew Taylor to lead an independent review into how employment practices need to change in order to keep pace with modern business models. It is also believed that an early version of the tool will be out by January or February but no official announcement has been made on this.

3. Public sector will continue to hire contractors

The flexible labour market is not going to get affected – something which was anticipated once the Autumn Statement was released. The government states contractors will continue to get hired, including those who choose to operate their own company.

4. No 5% tax-free allowance deduction for contractors running PSCs

The government gave into the pressure to many respondents who believed that limited company contractors in the public sector shouldn’t avail the benefits of 5% tax-free allowance. This will make calculating deductions of tax and NICs simpler and less burdensome for engagers and reflects the fact that PSCs will no longer bear the administrative burden of deciding whether the rules apply.

The government, however, states that some currently compliant contractors will experience a reduction in take-home pay as a result of the withdrawal of the 5% tax-free allowance. PSCs will, however, still be able to claim allowable business expenses and those available to employees.

The consultation on this draft legislation will run to 1 February 2017.