IR35 to be bypassed in the public sector - Is this the thin end of the wedge?

Today’s budget announced a surprise development in the ongoing IR35 debate, with a radical proposal as regards the treatment of limited company contractors working within the public sector.

The Government have announced that anyone working in this way will from 2017, be subject to a compulsory deduction of the correct employment taxes and the responsibility will move from their own company to the public sector body or agency/third party paying the company to make those deductions.

This will apply to all situations where the public sector body is the end user regardless of the number of intermediaries in the supply chain. This is not just Local and Central Government departments; it also includes the NHS, Transport for London and Channel 4 Television (amongst others). 

Given that there is already legislation on the test for ‘employment’ in the context of this kind of work and this test is so broad that it will be almost impossible to be outside it (see below), this proposal represents a major change of direction in the governments thinking in this area. While this will be subject to a future consultation, were it to be implemented, it would in effect make PAYE/RTI more or less compulsory in the public sector.   

Regardless of whether this is fair or not, it does seem that the legislators have scant regard for the legal concept of the limited company and seem to be making a clear distinction between a genuine business and a vehicle used primarily for personal tax advantage. While they have adopted a new name for limited companies used in this way (The Personal Service Company or PSC) there is no clear law on how these two entities can be distinguished. 

The current test (broadly speaking the same as that for determining self employment) is likely to be replaced by the more narrow SDC test (the right by anyone to impose supervision, direction or control in the manner in which the work is carried out).  Consequently, this new proposal could not only make anyone working on contract for a public sector organisation subject to PAYE/RTI, it could also effect small business’s carrying out work which required them to be present at the end users premises. This is particularly so, considering the long supply chains that are widespread in the public sector, the top end of which will invariably err on the side of caution and insist that employment is present and thus PAYE/RTI must be operated. 

Is this the thin end of the wedge? Probably. Having agonised about IR35 for many years, its inherent weakness (that it requires the individual companies to operate it) is now removed as that responsibility is imposed on agencies and/or others. They will operate PAYE mainly because there are in reality, few cases where there is not employment present as defined and because they will see no virtue in risking breaking the law to save someone else from paying income tax. It seems almost inevitable that if this goes through and if it works, it will be imposed on all contractors working this way, not just those in the public sector. 

This proposal is the most recent in a whole raft of legislation aimed at limiting the perceived advantages of working on contract. As ever the blame should be laid firmly at the door of those who tried to turn tax avoidance into a mass market business over the last ten to fifteen years, ironically as a consequence of the original IR35 in 1999 and have now brought down the wrath of a cash strapped government on everyone involved in the sector.

Tim Loftus - Director of Prisma Recruitment