IR35 & The Public Sector: 'Like a Grey Cat on a Foggy Day'

21.02.2017

I have borrowed a saying that I once heard to describe the initial implementation of IR35 in the title of this article.

I remember asking what constituted 'disguised employment' and someone saying there were rules but they were a bit like looking at a grey cat on a foggy day because you knew it was there, but you couldn’t quite tell where, or what it was doing.

IR35 is changing

IR35 is changing and, let me be very clear about this from the start, this article is about the changes and is not intended to give you any advice about how to deal with them. We are just helping you to look for the cat in the fog, so if IR35 may affect you or your business, you need to take individual advice on the right course of action. Essentially, this is part of the issue with current, and indeed it seems like future, legislation. There are no easily accessed answers to the problem of IR35 and how it could be applied because each case is individually assessed by HMRC should they decide to investigate.

Since its initial introduction in 2000, IR35 has probably been the cause of more consternation than any changes to employment law this century. At its core, the idea of IR35 does not seem too arduous. Basically, it is intended to stop people who are to all intents and purposes employed, using self-employment as a way to avoid tax. In reality, it is very difficult to pin down what ‘employed’ means. As a result, various arbitrary guidelines can be found, but essentially it probably comes down to whether the contracted person has some or all of these:

Control over supply of work. So essentially are you committed to certain hours or particular times and days. This is, of course, a requirement of some contracts but it is about having choice.
Do you have employee perks? This means bonuses, free gym memberships, Christmas parties, subsidised canteen or provided uniforms and so on.
Do you have other contracts and sources of income? Beware here though because there is a case by case imperative at work so more than one client may end up meaning more than one potential IR35 issue.
Can you substitute yourself for another person? Would it be allowable for you to use another person to do the work if you cannot?

The issue is that some or all of the above are likely to apply to just about any contract. So while you may well be required to work within certain times of the day for most contracts (because midnight is not practical) if the contract also states when and where then that is going to be pretty close to employment. As I said at the beginning, this article is not about advice because each case will be seen individually and cumulative evidence is hard to assess.

The big change

So here is where the big change is coming. In 2017 IR35 will specifically be applied to the public sector workers. Public departments have already been asked to consider if their internal contracting needs should be filled by permanent workers and that will mean changes. Contractors sitting at a desk working 9 – 5 hours and doing the same job as the employed person next to them will likely struggle to justify self-employment for example.

The responsibility is changing

Another major difference is that the responsibility for making the decision about who is and is not liable for IR35 will probably now be with the person responsible for the contract, normally the end engager. However, the company paying the contractor or rather the PSC (aka the Ltd Company) will be responsible for deducting the tax.

This is a huge shift in responsibility as in many cases, this will be either the recruitment agency or the client themselves. The burden of proof, therefore, that the contract status in relation to IR35 is valid will fall, not on the person supplying the service, but the person who is paying the wages. As will responsibility for the result of any investigation.

If you decide to switch from your PSC to an umbrella solution, then you will certainly be taxed correctly and you will likely earn less. Some have calculated this to be around a 13% difference, others say it depends on your contract rate.

In either case, if you are likely to hit IR35 and you work for public institutions such as the NHS, local councils, schools, potentially the BBC and Channel 4, or even HMRC, take advice on your status. Ironically of course around 60% of HMRC’s workforce in Newcastle is made up of contractors.

The government has promised to release clear guidelines and an online tool to help so hopefully all will become clearer soon. Let’s see if we can find that grey cat in the fog!