IR35 Guide: Off-Payroll Working (Public Sector)

From 6th April 2017, responsibility for assessing IR35 status (now referred to by Government and HMRC as ‘Off-Payroll Working’), shifted to the End-Client (i.e. the public sector authority). Previously it was the Intermediary (usually the individual worker’s own company) that decided the status of each engagement. For now, Private sector rules remain unaffected.

Where the public authority decides that the ‘Off-Payroll Working’ rules apply, then they (or recruitment agency if there is one in the supply chain) will be responsible for deducting Tax and NICs (both Employees and Employers NI), before paying the balance (the ‘deemed direct payment’) to the worker’s personal service company.

The public sector authority (PSA) have full autonomy to develop their own procedures in forming IR35 status decisions, often this may involve seeking legal advice and contract reviews. Most PSAs will utilise the ‘check employment status for tax’ flowchart in forming their IR35 opinion (available at https://www.tax.service.gov.uk/check-employment-status-for-tax/setup). Although not definitive, the outcome will carry substantial weight in any subsequent HMRC compliance.

The most common scenario where HMRC’s employment status test returns a decision that IR35 does not apply is where the intermediary has the right to send a substitute worker. There does not necessarily have to be an occasion where it has happened; however, the right has to be a genuine one.

Where IR35 does appy, the difference in 'take home' amounts often equates to between 10%-15% of the consultancy day rate (depending on the individual's level of earnings). Restrictions on travel expenses increase this disparity and can often mean it is impractical to accept a project with a long commute or which involves staying away from home. Of course, headline 'take home' percentages only tell part of the story. In reality, the opportunity to trade 'outside IR35', allows the flexibility to build funds within the business, contribute to pensions, and decide when profits are withdrawn and therefore when tax charges are triggered.