How Will IR35 Changes in the Public Sector Affect Recruitment Agencies?

Last month, the Autumn Statement confirmed that the proposed intermediaries legislation (IR35) reforms in the public sector will be going ahead, and this month the draft legislation for the Finance Bill 2017 revealed more detail about these changes. We give an insight into how these changes will work and how they will affect recruitment agencies.

Although the legislation itself isn’t changing, the liability for who determines whether a contractor’s assignment is inside or outside IR35 is changing for public sector engagements. Instead of the contractor determining their IR35 status, it is the public sector bodies who will, and they must inform the next intermediary. Although the engager (often the recruitment agency) does not make the decision on IR35, there is still a risk element as agencies have the responsibility to ensure that IR35 is operated corrected, and if an assignment is incorrectly treated as outside of IR35 then they will be at risk.

There will be an online tool with about 50 questions that will be used to help determine whether an assignment is inside IR35 or not, however there have been years of IR35 cases and each case is different, so whether a tool could truly determine a contractor’s IR35 status is under scrutiny. The tool basically gives HMRC’s opinion on whether or not an assignment is caught by IR35, and they will stand by this decision if the result is ‘outside’. However they could still investigate which is why it is important to ensure all information entered is correct.

With determining IR35 status, there may be natural ‘over-compliance’ which might make contracts in the public sector less attractive for workers. There will be a need to ensure that there are compliant supply chains and increased communication throughout, and if contractors’ assignments are caught by IR35, then agencies may need to change the contracts in order to make the relevant deductions.

How Your Contractors Will be Affected

If the public sector opinion is that an assignment is inside IR35, then the recruitment agency will have to ensure that PAYE is operated on the payments made to the PSC. If the public sector opinion is outside IR35 though, then the recruitment agency will need to ensure that they are comfortable with paying the PSC outside of IR35.

For contractors operating via a PSC to be inside IR35 will now mean that all profits from each relevant engagement will be subject to full income income tax and NICs. Although contractors will still be able to register for the Flat Rate VAT Scheme, the 5% allowance for admin expenses will be removed in the public sector as contractors will no longer have to determine their IR35 status themselves. We are also expecting details of changes to the Flat Rate VAT Scheme shortly.

If contractors are caught by IR35 in the public sector, then there will be negligible financial difference between full employment and operating as a PSC. However ICS have a variety of potential solutions available to recruitment agencies and their contractors, to find out more about these please call ICS on 0800 195 3750.