Recruitment sector shake up – IR35 changes in the public sector

Posted on: December 21st, 2016

The Chancellor has announced that proposed changes to the Intermediaries Legislation (IR35) in the public sector will go ahead next year. These changes will make recruitment companies liable for the taxation of contractors using a personal service company (PSC) in the public sector.

As of April 2017, the responsibility to apply IR35 will fall to the party who has the contract with a contractor’s PSC, which will almost always be a recruitment company. Recruitment companies will need to determine whether a contractor is legitimately self-employed (outside IR35) or whether their working practices are more akin to employment (inside IR35). If a contractor is deemed to be inside  IR35, the recruitment company will need to deduct PAYE and National Insurance Contributions from all payments made to the contractor’s PSC.

In introducing these changes, HMRC have passed the administrative and compliance burden of determining worker status on to the recruitment industry – an industry already operating on tight margins, particularly in the public sector where rate caps have been introduced. The changes also make it easier for HMRC to enforce collection of unpaid income tax by pursuing the recruitment company rather than the PSC, which may not have the funds to meet the tax bill.

A concern for recruitment companies is that IR35 status is difficult to determine and can change over time, so the reform will require recruiters to keep abreast of contractors’ movements, working relationships and set up. Although HMRC intend to introduce an ‘online tool’ to help recruiters assess worker status, the effectiveness of this tool remains to be seen.

We envisage that a large number of recruitment companies will err on the side of caution and will ensure that all payments to PSCs are subject to PAYE deductions. This may result in contractors being drawn to the less risk-averse recruitment companies, where the financial benefit for the PSCs will be higher, or that the use of PSCs in the public sector will dramatically diminish.

A technical note of the changes in the public sector was produced last week and can be accessed here. Whilst the April 2017 clampdown will only apply to the use of PSCs in the public sector, it is likely that the Government will extend the changes to the private sector in the future. We will keep an eye out for further announcements and will provide updates in due course.

If you have any questions concerning the IR35 changes, please contact the Recruitment Sector Team.