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This move has been generally welcomed by contractors, representative groups and industry specialists who have in the past been critical of the proposals to make the end-client and agents response for the employment status - and tax liability - of contractors operating in the public sector.
Now the Finance Bill has been published, it shows that from next month, public sector end clients will be responsible for determining the status of a contractor’s assignment to supply services through a Personal Services Company (PSC) or LLP, as outlined in the Finance Bill 2017.
The final legislation includes a new responsibility on public sector bodies to take ‘reasonable care’ when determining the contractor’s tax status and, consequently, they will become liable for covering taxes and National Insurance Contributions should HMRC decide that ‘reasonable care’ was not taken in making the decision.
Under the draft legislation, the recruitment firms were saddled with this burden.
In addition, contractors now have a legal duty to notify recruiters whether she or he supplies services through a PSC, an LLP or through another individual and, in addition, Managed Service Companies now also fall within the Off Payroll rules.
It is considered that the need for 'reasonable care' now means that public bodies will not be able to make a blanket assessment to classify all their contractors as inside - or outside IR35 - but will have to consider each case separately.
ARC - Still flawed
The Association of Recruitment Consultancies (ARC) gave the changes a cautious welcome but reaffirmed its belief that the plan still flawed.
Adrian Marlowe, Chairman of ARC, said: "This is very welcome as the entire scheme to make agencies liable for IR35 contractor tax was heavily flawed without this adjustment. Even now the arrangement still has loose ends in that the hirer only has to inform the agency of the IR35 status before the contract starts and there is no mechanism in the event of subsequent adjustments to the arrangements, therefore still leaving the agency exposed in those circumstances. But the inclusion of this care test along with strict time limits, coupled with a transfer of liability in the event of hirer breach, now passes the ultimate liability quite correctly back to the hirer.”
ARC was one of the many groups which had taken a robust stance on the new IR35 proposals since they were published in December, having been advised that the new HMRC IR35 online tool (the ‘Employment Status Service’), central to the government policy, was deeply flawed so affecting the lawfulness of the scheme itself.
Mr Marlowe said: “We had garnered a great deal of support for our actions including from APSCo, the IOR and many agencies along the way, and had built up a fighting fund to support legal action. However this is a major concession and it lances the primary boil that we and our members were so concerned about. This battle appears to have been won and it demonstrates what can be done if we all work together.”
This does not mean the effort is entirely over. He said:"The legislation still leaves much to be desired as it has the effect of charging a 13.8 per cent employer NICs amount onto the agency, and adds on an apprenticeship levy charge where the agency payroll exceeds £3m per annum. These charges are unfair particularly given the potential impact on current contracts, the lack of transitional provisions, and the administrative effort required to address what could amount to a very significant loss for agencies.
“The impact on public sector hirers has yet to be fully seen, as I regularly read reports that contractors are pulling off site and/or are charging higher rates, none of which can be helpful with key government projects that have already been costed, such as HS2. As we progress into the post Brexit era ARC would prefer to see a more joined up approach at government level and what is really critical is the need for government to consult more fully with our industry at the point of policy making, not months or years thereafter.”
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Its CEO, Seb Maley, said: “As stated in the Finance Bill, it is key that ‘reasonable care’ is taken when setting the IR35 status of public sector contractors. Put simply, this means that public sector clients must not make general, blanket determinations and should make sure that every contractor engagement is considered independently and fairly.
“Wrongly placing contractors inside IR35 will come at a significant cost to contractors themselves, with public sector bodies and agencies suffering too if a lack of care is taken. 85 per cent of contractors plan to stop working in the public sector should they be placed inside IR35, affecting everyone in the supply chain dramatically."
Apsco - onus on client
The Association of Professional Staffing Companies (APSCo) welcomed the change that the ultimately responsibility for determining the contractors' status does not rest with the agent. has responded to the publication of long-awaited final legislation on off-payroll working in the public sector.
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“As we outlined in discussions both inside and outside of HMRC’s IR35 Forum, and in our official responses to the consultations, firms working with professionals in the public sector aren’t tax experts. They also have no visibility of how a role is undertaken on the client site, or indeed how the contractor runs his or her PSC or LLP and so are ill-equipped to determine tax status. The ‘reasonable care’ provision, which was dropped into the legislation at the eleventh hour, puts the onus back onto the client.
“We also welcome amendments since the draft schedule which place an obligation on the contractor to prove their intermediary meets the conditions for Off Payroll to apply, further moving determination away from the recruitment profession.
“While recruiters working with public sector organisations will, of course, have to be vigilant and compliant when placing PSC contractors, by questioning clients’ decisions, for example, it is a relief that the sector has not been lumbered with the administrative and financial responsibility of determining if engagement is inside or outside of Off Payroll. However, the professional recruitment sector continues to struggle with implementing a “deemed employment” payroll in time for the 6th April deadline, given software providers were not in position to start finalising changes until 20th March 2017.”
The new law is set to apply from April 6, 2017.
Further information
More information about the IR35 changes in the public sector is available in the News on IR35 section of Shout99
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Susie Hughes © Shout99 2017
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