IR35: Intermediaries Legislation for off-payroll working in the Public Sector

06 March 2017

The intermediaries legislation, known as IR35 is designed to make sure contractors pay the required tax and National Insurance on earnings.  From 6th April 2017, the responsibility for deciding the employment status of contractors to the Public Sector will shift from the contractor to the client. 

The online Employment Status Service (ESS) test will provide the view of HMRC on whether a worker on a specific engagement, should be classed as employed or self-employed for tax purposes:

HMRC confirm they will stand by the result given unless a compliance check finds the information provided isn’t accurate and although the test is anonymous and doesn’t store information, a printed copy of the result should be kept as evidence to confirm a check was duly completed in order to comply with the legislation.

Please see our full summary of the implications below and if you would like to talk through any questions or issues, please do not hesitate to contact us.

Summary of intermediaries legislation (IR35)

Intermediaries Legislation for off-payroll working in the Public Sector

The  government announced its intention to introduce changes affecting public bodies that hire off-payroll workers in the 2016 Autumn Statement.  These changes will apply from 6th April  2017.  The  provisions to implement these changes are subject to Parliamentary approval and Royal Assent of the Finance Bill 2017. The consultation period for receiving comments on the draft Bill closed on 1st February 2017.

HMRC published guidance in respect of personal service companies on 3rd February 2017.

Who is affected?

Public authorities that hire off-payroll contractors who provide their services through an intermediary.

Public authority is as defined by the Freedom of Information Act 2000 and Freedom of Information (Scotland) Act 2002. This covers companies owned and controlled by the public sector, local authorities, the NHS, educational establishments including universities and academies.

The Changes

Where a personal service company (PSC) provides the services of a worker to a public body, it is that public body, as the end client, that will be responsible for deciding whether the intermediaries’ legislation (also known as IR35) should apply. If it finds that the rules should apply then it would also have to pay to HMRC the tax and National Insurance on the deemed employment payment, deducting those amounts from the amount it pays to the PSC.

Deciding if the rules apply - The Intermediaries Legislation

An intermediary can be a personal service company (PSC), a partnership or  other individual. Most intermediaries providing workers will be PSCs. Anti-avoidance legislation catches individuals who  would be employees of their clients if they did not use an  intermediary. In general, a self-employed worker is not under the control, direction or supervision of the client and in business with a view to making a profit.  The employment status of the worker therefore needs to be  considered to determine if the rules apply.

The following are factors to consider for  each worker:

  • Is the worker required to provide their own personal services or is s/he able to offer a substitute or sub-contract work?
  • Is the end client obliged to offer work and the worker obliged to do this throughout the contact?
  • Does the worker have the right to terminate the contract at any time?  If so, please consider the notice period.
  • Does the worker have autonomy of his/her methods of work?
  • Does the worker have to report to a manager who supervises his/her work?
  • Is the worker entitled to choose their own hours of work?
  • Does the worker use his/her own tools and equipment to carry out the services?
  • Does the worker quote on an  assignment basis or  is s/he paid for  whatever work is done?
  • Is the client financially responsible for any  worker required to correct any  defects in his/her own  time?
  • Does the worker need to obtain permission to take time off?
  • Is the worker subject to any internal rules and regulations of the end client that are similar to those that apply to employees of the client e.g. does the worker claim for reimbursed expenses using the client’s own  expense claim forms?
  • Does the worker’s company have business insurance such as public liability or professional indemnity?
  • Has the worker ever been an employee of the client?  If yes, is the worker providing the same services?
  • Is the worker entitled to use any staff-only facilities?
  • Is the worker clearly identifiable as a contractor when attending the client’s site and treated as such?  E.g. attending staff meetings, staff social events, having an email address at the client’s.
  • Does the client prevent the worker from doing work for other clients during the engagement?
  • Is the worker entitled to any holiday or  sick pay  or  other employee type benefits?

To assist in deciding whether the rules apply to a particular engagement of a worker, HMRC launched an optional online tool (Employment Status Service “ESS”) on 2nd March 2017:

The ESS tool replaces the previous Employment Status Indicator tool.

Implications if the rules apply

Where it has been determined that the off-payroll working rules apply, the public body’s key responsibilities are:

To pay the income tax and primary class 1 NIC liabilities to HMRC. This should be done in real time, on or before the date of deemed payment to the worker, on  a Full Payment Submission (FPS), in the same way as for  employees. The liabilities must be paid over to HMRC by the 19th or  22nd calendar day  of the following month.

Also pay secondary class 1 NICs due in respect of these engagements, and report them to HMRC.

Paying the deemed direct payment direct to the PSC, which is made net of employment tax and Class 1 primary NICs. A 5% deduction currently allowed to intermediaries for “notional expenses” will not be  available in the public sector when computing the deemed employment payment.

The off-payroll worker in the public sector will not be entitled to statutory payments, not be subject to student loan deductions nor  be  enrolled in to the public body’s pension scheme.


Where PSCs are supplied via agencies, it is the public body’s responsibility to determine the worker’s employment status.  The public body should notify the agency of its decision as to whether the off-payroll rules apply and the agency should operate the PAYE and NIC on  the payments to the PSC. Where an agency requests this confirmation and the public body does not respond within 31  days of such as request, the responsibility for  deducting tax and NIC falls on  the public body.

Action before 06 April 2017

  • Identify all PSCs currently engaged directly and provided by agencies;
  • Review contracts with agencies and PSCs to identify those  caught  by the new  rules;
  • Review current systems to determine employment status including review of contracts and working arrangements;
  • Issue communication to current PSCs and agencies outlining the new rules; and
  • Consider the additional cost of implementing the rules and also employer’s NIC on existing and future contracts with PSCs caught by the rules.

If you would like to talk through any questions or issues, please do not hesitate to contact us.

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