IR35 and the public sector – to be employed, or not to be employed

Technical blog by Pauline Scott, Technical Co-ordinator |  6 June 2017

The new tax year that began on 6 April 2017 saw changes to the current intermediaries legislation, known as IR35. IR35 is applied to off-payroll working in the public sector, including those in the NHS, councils, armed forces, police, schools, and further and higher education.

Where the rules apply, people who work in the public sector through an intermediary will pay employment taxes in a similar way to employees. Where the end client is not defined as a public authority then the rules continue to operate as before.

Who is likely to be affected?

  • people working for a public sector organisation through an intermediary, such as a personal service company (PSC);
  • public sector organisations and agencies supplying staff working through PSCs to the public sector; and
  • other intermediaries such as partnerships may be impacted where engagements fall within the off-payroll rules.

The reform applies to payments made on or after 6 April 2017, including payments made for contracts entered into before that date.

One notable change is that the burden of deciding whether or not IR35 applies shifts from the worker’s intermediary to the public authority.

What action has your organisation taken to ensure compliance with this legislation? Have the risks associated with this been considered and included on risk registers? Have processes and controls been put in place to mitigate the risk?

The impact of this change is likely to be felt over a number of departments within an organisation, for example:

  1. HR will need to know whether the post they are filling is likely to be subject to these reforms. People applying for these roles through intermediaries will need to know the tax implications in advance.
  2. If your organisation uses an employment agency, or other third-party, to supply labour they will need to tell the agency if the rules apply for the positions they are filling.
    Where the rules apply, procurement teams may want, or need, to change existing contracts and draft future contracts to reflect changes in how invoices from such intermediaries will be paid.
  3. Where the reforms apply, tax and national insurance will be deducted from fees, and reported and paid over to HMRC in real time. Employer’s national insurance will also be payable by your organisation
  4. Invoices received from intermediaries affected by these changes will need to be paid net of tax and national insurance.
  5. VAT may also be payable on the gross amount of the invoice

So, what does this mean for internal audit?

The board and audit committee may want assurance from internal audit that they are adhering to IR35 and to ensure that the organisation has made the required changes to their systems, processes and procedures. Internal audit may be asked the following:

  1. to confirm processes are in place to establish whether individuals are employed or self-employed;
  2. to confirm that departments have systems in place to identify those working through intermediaries;
  3. whether the procurement processes are in line with the legislation;
  4. to ensure updated engagement processes are in place not only through procurement but also where budget holders have authority to engage directly; and
  5. whether the organisation has the revised systems and processes within payroll and any agencies to operate the new legislation.

Alternatively, ensuring IR35 is adhered to may be incorporated into internal audits within the annual plan for each department affected, such as HR, Finance and Payroll, by extending the scope of the audit to ensure that the organisation is meeting the new legislation.

For further information, detailed guidance has been published by HMRC that helps public authorities understand how these reforms will change the way they pay for workers affected by these changes.

Content reviewed: 2 October 2019