IR35 and the Public Sector

IR35 and the public sector

It’s a four-letter word that’s been around for a while, but it is back on everybody’s lips this spring and I believe all employers need to give some serious thought about what it means for them.

IR35 – the intermediaries legislation – was introduced at the start of this millennium to tackle disguised employment.

While Tony Blair spent the late Nineties meeting Oasis songwriter Noel Gallagher and talking about education, education, education, his Labour government also found time to tackle another trend of the time.

It was becoming increasingly common for people to leave a job on a Friday, form a limited company on a Saturday and arrive back in the office doing the same work for greater reward on a Monday.

Normally these individuals would award themselves a nominal salary from their company’s income, and take the rest through dividends, which were taxed at a lower rate and avoided certain national insurance contributions.

IR35 was introduced to remove any protection given by the existence of a limited company in itself. Under the legislation, if the underlying relationship between a company and a worker is deemed to be an employment one, then usual employment tax and national insurance payments apply.

This was designed to remove the incentive for everyone to work under a limited company, and to boost government tax receipts. However, it never really had the teeth to achieve its aims.

With the onus on individuals to work out and declare their status under IR35 legislation, many chose not to – either because they didn’t understand the nuances of the legislation, or because they simply fancied their chances of getting away with it.

So fast forward 17 years and Theresa May’s Tory government is taking the IR35 legislation one step further.

As of April this year, any public sector body or related agency paying a limited company is liable for deciding whether IR35 applies. With interest and penalties possible  on top of the tax and national insurance payments owed, many state-funded employers are taking a zero-risk approach.

That means assuming all limited companies are caught by IR35 and thus deducting tax and national insurance at source. This can mean a huge difference in take-home pay for many people – some of who will be on long-term contracts agreed some time ago  – and in many cases with no negotiation. As the contract itself will not be changed people will be stuck in a situation where they are taking home less money for the same work and working conditions.

While the changes were trialed for some time, HMRC didn’t confirm them until mid-March. An employment status verification tool didn’t materialise until around that time either. So it all happened very quickly, especially for the individuals whose net pay has just plummeted. In addition, many people being asked to review and ensure compliance with the new rules have no experience in this area. A very real danger is that public sector bodies may find themselves with an suddenly depleted workforce that they cannot rebuild.

In some industries, such as IT, people can easily move to the private sector. The public sector has always struggled to compete on pay with commercial entities, and now the scales have tipped too far for many.

For the government, I’m not sure how useful the changes made so far will be. If there is an exodus of talent, and salaries have to rise to attract new people, then any extra tax revenue may just be spent on pay rises.

With this in mind – and the aborted Budget attempt to raise national insurance for the self-employed – what is the next move likely to be? You guessed it – an extension of the IR35 employer responsibilities to the private sector.

I think this could happen quickly – possibly within 12-24 months. If we get a Labour government again next month then it could even come sooner and harder.

Whatever industry or sector you’re in, if you use limited companies then I advise you to consider the implication of potential IR35 changes now.
In the private sector there will be a more commercial view and if a few firms take the risk of allowing people to stay self-employed, then the others will need to do what they can to stay competitive.

If legislation requires all employers to work out the underlying nature of their relationships with people running limited companies, be prepared for a world of complexity.

How do you decide whether someone should lawfully be employed or self-employed? It’s a very tricky spectrum. The government has some guidelines, but they include phrases such as ‘probably self-employed’ and ‘most of the following are also true’.

There is now the updated employment status indicator tool but the HMRC could say that if you have not put in the right answers then that doesn’t protect you.

The main principles for deciding on employment status are control – for someone to be self-employed they need sufficient control over how they work – and personal service – they are likely to be employed if they are required to do the job themselves.

But there is a lot of case law that can be used. There are hundreds of cases and HMRC can pick and choose what applies; there is bound to be a counter-argument to any argument you make.

RIFT works with employers all the time on these kinds of issue – we look in detail at how people work and try to give absolute answers that employers can rely on.

If you use limited companies, get in touch – we are ready to identify potential issues and ensure you feel prepared