It’s one of the biggest topics of conversation within the industry, creating a massive stir for contractors and steadfast decisions from end clients. The off-payroll working in the public sector reform is about to cause more waves this year and we will look at the effect this will have on all those involved.

We are now aware that contractors working with the public sector are going to feel a considerable sting from 6th April 2017, as announced by the Chancellor in the Autumn Statement and confirmed in the published draft legislation (Finance Act 2017).  PSCs who supply their services to the public sector, either through an agency or directly to the client, will now be treated differently from those who supply their services to the private sector. Public sector contractors will no longer face the responsibility of determining their IR35 status, as this decision will now fall with the public authority and the paying agent will be responsible for deducting tax and NIC should the off-payroll rules apply.

Therefore, if the Public Authority confirms that a contractor will be working inside IR35, then PAYE and NIC deductions will be made by the paying agent prior to any payment being made to the PSC.

The government introduced this legislation to ensure that those working within the public sector, which would normally be deemed as employees, do not avoid paying the full amount of NICs and employment tax.


Who is affected?

  • Public Authority Body
  • The Recruitment Agency
  • The Contractor PSC


What is the response?

– The Public Authority body

This legislation affects the full supply chain and is already having a profound impact on the industry. Public Authorities will need to review all outsourced work and confirm whether their contractors are within the IR35 legislation. It is widely anticipated that 90% will be considered to fall inside the new rules.

We’ve seen a number of public sector bodies take a no-nonsense approach and simply refuse to work with PSC contractors when the new changes come into force.

TfL was one of the first to announce this, informing all PSCs that they either need to go PAYE, umbrella or essentially, find another job by April.

The BBC has warned contractors they may not be able to operate through their limited companies and Channel 4, although looking into increasing pay rates, have advised that they are all to be paid PAYE.

The MOD will be placing everyone as PAYE, and the Education sector including some Housing Associations will no longer work ‘outside IR35’ therefore only accepting contractors who are inside IR35.

It appears that some contractors may be dissuaded from continuing roles within the public sector after April, and for those that remain will be forced to increase their pay rates.


– The Recruitment Agency

Recruiters will need to amend contracts with all public sector clients as well as their contractors. They will need to establish assignment statuses directly from the public sector body, with a clear understanding as to how this decision was reached especially if the contractor is ‘not caught’ by IR35. The public authority body has 31 days to provide the relevant evidence of their decision.

This will also affect any invoices that are due to be paid after 6th April, as current engagements for 2016/17 are not subject to the rules; however, any payments made in the new tax year will need to take the new legislation into consideration.

Recruitment agencies will need to speak with their contractors to inform them of impending changes and their options. This is a good time for agencies to establish a preferred suppliers list with compliant umbrella companies. This will strengthen supply chains and provide reassurance that all necessary information to process RTI is supplied.

Cloud9 Umbrella and K&B Accountancy Group are currently working with PRISM to introduce REMIT into our supply chain. This ‘firewall’ has been developed with recruiters in mind and REMIT will be responsible for all liabilities as the ‘fee-payer.’ For any recruitment agencies looking to find out more regarding this, then please give us a call to arrange a visit.


– The Contractor PSC

Many will want to keep their PSC status, especially if they toggle contracts in both the public and private sectors. However, this may not be efficient, or even disallowed by some end clients who have taken the ‘no-PSC’ stance.

It is feasible that HMRC may decide to retrospectively look at assignments, if a role is deemed to be inside IR35 post-April, raising tax concerns for contractors. This is still speculative as we won’t know whether this will be actioned until after April.

Contractors can consider taking an IR35 contract review, with Bauer & Cottrell for example, to help their position. However, this doesn’t necessarily mean that the Public Authority will take the results of the review into account. In a situation where a contractor wishes to appeal the decision of the public authority, then an independent IR35 review will be crucial for evidence.


The rise of the umbrella company

Therefore the appeal to switch to an umbrella company is becoming more of a reality for contractors in the public sector. The administrative hassle of operating inside IR35 through a PSC for a decreased take home may see a large number of contractors look for alternate options to get paid.

Recruitment agencies within the public sector need to be comfortable that the umbrella companies they work with make all PAYE deductions are made on behalf of the contractor. Compliance is vital, with the number of providers offering tax avoidance schemes or substitute solutions increasing, the temptation to use an umbrella company offering high retention is appealing. However, HMRC is equally aware of such providers and there’s the risk of penalties or paying back unpaid taxes when caught.

A compliant umbrella such as Cloud9 Umbrella offers continuous employment for contractors entitling them to employment rights such as holiday pay and SSP. There is no need to worry regarding payments to HMRC, as the umbrella company processes all employment income on a PAYE basis. A diligent umbrella company is now an appealing and straightforward solution for public sector contractors, as well as relieving recruitment agencies the burden of having to pay the worker.


We are committed to making contracting both transparent and easy by offering a simple and efficient on-boarding process for both contractors and agencies. If you would like to find out more information about how the impending public sector reform may affect you then give me a call on 0207 078 0212 or pop an email to [email protected].