Consequences of the Changes
The new laws will have a significant impact on the recruitment industry, including:
• Recruitment businesses supplying PSC contractors into public sector bodies will be responsible for making sure the correct income tax and National Insurance is paid on the contractor's assignment. If you get it wrong, you will be liable for the underpayment and for the interest and penalties imposed by HMRC.
• Many public sector PSC contractors will see their take-home pay reduced, which will lead to difficult questions about who will pick up the cost. If the contractor is important to the public sector body, then recruitment businesses may come under pressure to pick up some or all of the lost pay.
• HMRC's new two-tier test and online tool will be critical. If it requires recruitment businesses to make subjective decisions about a contractor's employment status, then they will be forced to err on the side of caution and assume all PSC contractors are employees for income tax and National Insurance purposes.
• We may see contractors moving away from the traditional PSC model and toward other PSC and employed solutions. PSC contractors are unlikely to be willing to give up their employment rights (e.g. the right to claim unfair dismissal, the right to redundancy payments, etc) if there is little financial incentive to do so.
IR35 was introduced in 2000 to make sure individuals cannot avoid paying income tax and National Insurance simply by providing their services via their own PSC.
IR35, which involves a series of difficult employment-status tests, must be applied to each PSC contractor's assignment. If IR35 applies, then income tax and National Insurance must be paid as though the contractor were a direct employee of the hirer.
The government believes there is widespread IR35 non-compliance and that many PSC contractors do not pay the correct amount of income tax and National Insurance. The government is therefore introducing new laws to clamp down on IR35 non-compliance in the public sector.
The government's proposals are at the consultation stage which is due to close on 18 August 2016 with the new laws coming into force in April 2017.
The Current Rules
Under the current rules, where a PSC contractor works for a hirer in the public or private sector, the PSC must decide if IR35 applies to the assignment. If IR35 applies, the PSC makes the appropriate tax and National Insurance deductions and accounts to HMRC. If the PSC gets it wrong, the PSC is liable.
The New Rules
The government believes recruitment businesses supplying contractors into the public sector have a duty to ensure their PSC contractors pay the correct income tax and National Insurance.
From April 2017, where a PSC contractor is supplied by a recruitment business into a public sector body, the recruitment business must decide if IR35 applies. If IR35 applies, the recruitment business must make the appropriate tax and National Insurance deductions, report the taxes through RTI and account to HMRC. If the recruitment business gets it wrong, it will be liable for the underpayment and for the interest and penalties imposed by HMRC.
If there is more than one recruitment business in the supply chain, then IR35 must be operated by the recruitment business which contracts directly with the PSC.
The government has said it will provide a straightforward two-tier test and interactive online tool which can be used to determine whether IR35 applies to a PSC contractor's assignment. The tool will be binding on HMRC so that if the tool says an assignment is outside IR35, HMRC cannot later challenge the decision (provided that accurate information has been entered into the tool).
The new laws will not apply to PSC contractors in the private sector.
What should recruitment businesses do now?
As the new laws are due to come into force in April 2017, recruitment businesses should start taking action now to ensure they are prepared. In particular, they should:
• identify the supply chains which will be affected by the changes (including direct supply models and supply via other agencies)
• speak to their professional advisers to identify suitable solutions to issues such as reduced take home pay for PSC contractors
• review payroll processes to make sure PSC contractors can be paid correctly and tax and National Insurance remitted to HMRC and reported through RTI
• review contracts with clients, other agencies in the supply chain, umbrella companies, payroll providers and contractors to make sure they protect the recruitment business from the potential risks introduced by the new laws