This is a significant u-turn by the NHS which had previously applied a blanket ban on all PSC contractors, insisting that every PSC contractor was caught by IR35 and must be put on the payroll.
Hopefully it will lead to other public sector hirers taking a more measured approach to IR35. If it does, it will help stop the flow of PSC contractors away from the public sector and give recruitment businesses more opportunities to fill public sector vacancies with the right talent.
As a reminder, the changes to IR35 in the public sector came into force on 6 April 2017. They shifted responsibility for determining the IR35 status of contractors working through intermediaries, normally a PSC, from the PSC to the public sector hirer.
They also shifted responsibility for accounting to HMRC for the correct income tax and NICs from the PSC to the 'fee payer'. The 'fee payer' is the entity which pays the PSC. The 'fee payer' will normally be the hirer or recruitment business as follows:
The IR35 rules in the public sector have been heavily criticised. There have been a number of incidents of highly-skilled public sector contractors moving to the private sector and public sector hirers having to increase pay rates to compensate contractors for lost remuneration.
The government has developed an online tool, the Employment Status Service, to help determine IR35 status. However, it has also been criticised for being unreliable and inaccurate.
Prior to 6 April, NHS Improvement advised the NHS that because many individuals providing services to the NHS via PSCs fall within IR35, all locum, agency and bank staff should be subject to PAYE and on payroll for the new financial year.
NHS Improvement has now adjusted its position in its publication issued 30 May 2017 - Working Through Intermediaries: IR35 Update - and has acknowledged that its blanket policy on PSC contractors was incorrect.
NHS Improvement now advises that an assessment of whether or not IR35 applies should be carried out in a fact-specific way and on a case by case basis and not by a broader classification of roles.
Therefore, the NHS will need to consider whether or not an individual in their particular situation is self-employed when they determine the application of the IR35 rules in that case. The consideration must be conducted fairly, accurately and take into account all relevant factors, including representations made by the PSC contractor.
NHS Improvement suggests that HMRC's Employment Status Service should be used to determine whether an individual should be considered employed for tax purposes. However, it goes on to say the tool is "guidance" and "does not negate the need for case-by-case scrutiny".
Our Recruitment Sector team is experienced in advising on all recruitment sector issues, including IR35 in the public sector. If you are a recruitment agency supplying into the public sector or a public sector organisation and need assistance on IR35 matters, we would be happy to help.