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Reforms to IR35

Reforms to the Intermediaries Rules will affect 'off-payroll' engagements of workers who operate through an intermediary, such as their own limited company, in the public sector. Final versions of the legislation are expected on 20 March 2017, so what can we expect?

Following talks in 2015, one of the key items that came out of the spring 2016 budget was that the government would act to reform the intermediaries rules, also known as IR35.

These affect 'off-payroll' engagements of workers who operate through an intermediary, such as their own limited company or LLP, in the public sector.

This includes engagements through third parties such as employment agencies, outsourcing companies and consultancy firms who supply workers.

The government consulted on its proposals in the summer and the announcement in the autumn statement that these new rules would be introduced is as expected. A technical note and draft legislation was published on 5 December 2016. Final versions of the legislation are expected on 20 March 2017.

What is IR35?

The intermediaries rules were introduced in 2000 to ensure that individuals who work off-payroll through an intermediary (often through limited companies known as PSCs), who would be taxed as employees if they were paid directly, pay employment taxes on their income. Under these rules the director of the PSC, for example, is required to assess whether IR35 applies and, if it does, account for income tax and national insurance on the payments that it receives for the engagement.

The rationale for change

Despite the existence of the rules, the government has estimated that only one in ten intermediaries who should be operating the rules on at least part of their income are doing so and believes that public sector bodies should be doing more to ensure that those who work for them off-payroll pay the right amount of tax.

This new legislation will run in parallel with existing procurement rules for engaging consultants in the public sector.

What do we know?

A new chapter, Chapter 10, will be inserted into part 2 of the Income Tax (Earnings and Pensions) Act 2003. The new legislation will be triggered where:

  • workers provide their services to a public authority through an intermediary
  • the worker personally performs services, or is under an obligation to personally perform services for a client 
  • the client is a public authority; and/or
  • the services are provided under circumstances where, if the contract had been directly with the client, the worker would be regarded for Income Tax purposes as an employee of the client, or the holder of an office with the client, or the worker actually is an office holder with the client.

Meaning of public authority

The definition of public authority set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002 will be used to assess what constitutes a public authority. This covers organisations such as:

  • government departments, executive agencies and non-departmental public bodies
  • the NHS
  • police and fire authorities
  • local authorities
  • devolved administrations
  • educational establishments, including universities
  • BBC and Channel 4, and
  • the Bank of England.

Assessment of employment status

The public authority must assess the arrangements under which the worker provides their services to them, if the way in which the services are provided would mean that the worker would be considered an employee but for the existence of the intermediary, then the engagement is caught. 

An assessment of employee status under Chapter 10 uses the same principles derived from case law that are applied where an organisation engages a worker directly and also under the existing IR35 rules. 

To help parties when deciding whether the rules apply, HMRC is developing a new Employment Status Service digital tool. The questions in the tool will be based on existing case law and HMRC will provide clear and simple guidance explaining technical terms, how the questions might apply and what to do if the circumstances of the contract change. The tool will be updated to reflect any new case law.

If applying the employment status test to that engagement shows they would have been employees and certain conditions about the ownership of the intermediary are met, then the public sector body, agency or other third party paying the intermediary (the fee payer) will be liable to account through payroll for any associated income tax and employee's national insurance on fees (exclusive of VAT) paid to the intermediary as well as paying employer's national insurance.

Other key points

There are anti-avoidance provisions to deal with situations where the agency or third party that would be the liable fee payer is offshore. In such a situation the liability moves to the next person in the contractual chain who is in the UK. Public sector bodies will need to understand the consequences if they are contracting with non-UK entities.

The new legislation will also cover situations where work is completed before 6 April 2017 but payment is made on or after 6 April 2017. So public authorities will need to consider existing contracts and prepare for the change.

Off pay roll working in the public sector does not create any new pension obligations on the public sector, agency or third party.

The obligation to account for tax if Chapter 10 applies falls on the organisation paying the intermediary.  he public authority client must inform the intermediary, agency, or third party with whom they have a contract to provide the services that the contract falls within the new off-pay roll rules or that it does not. The legislation provides that this can be included in the contract with the agency or separately. If the public authority client does not provide this information within 31 days of a written request to do so, then they become responsible for accounting for PAYE.


This legislation is a very significant move as it changes the long held position that the intermediary would need to assess whether IR35 applied, and account for tax on fees if it did. That obligation will now be on the public sector body, where it engages (and pays) the intermediary directly, or on third parties that supply (and pay for) the services of worker through a PSC to a public sector body. If you are potentially caught by these changes you should start preparing for implementation by reviewing pay roll services and engagement protocols to ensure that your systems can cope and comply with the new rules

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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