IR35 and the Public Sector
Contractors working in the public sector through a personal service company (PSC), such as a limited company, are no longer able to determine their own IR35 status as of 6 April 2017.
HMRC passed legislation for off-payroll workers in the public sector to stop the tax avoidance of workers engaged through their own limited company, who would otherwise be working as a regular employee if not for their PSC arrangement.
If you work in the public sector through your own limited company, your public sector client is responsible for determining your IR35 status, and should take reasonable care in making the assessment.
If your client deems your assignment as being inside IR35, they must inform your recruitment agency or other third party body, who will then make the necessary tax and National Insurance deductions before making payment to your limited company. If you contract directly through the public sector body, the public sector body will make the deductions.
What happens if I am inside IR35?
If your assignment is deemed to be inside IR35, you have some options:
- Continue working through your limited company – you could continue to contract in the public sector through your limited company, and accept the lower take home pay you will receive. You will also no longer be able to claim certain expenses.
- Negotiate a higher rate – adjusting your rate to make up for the loss in take home pay is an option, although an adjustment that your client will agree to might not make up for the loss.
- Switch to umbrella – switching to a compliant umbrella company means you won’t have to pay any Corporation Tax or dividend tax on top of paying income tax and employees NI, and you will receive employee benefits unavailable to you when contracting through a limited company. Find out more about switching to umbrella.
- Leave the public sector – as many contractors have chosen, you also have the option to leave the public sector for the private sector, where these rules to do not apply to the same extent.
Please note that this is not an exhaustive list of your options, and you should consider speaking to an expert before making a big decision. Contact us to discuss your options.
How will my client determine my IR35 status?
Your public sector client should take reasonable care when deciding whether IR35 applies to your assignment, as the legislation states.
There are a few ways for your client to determine your tax status:
- Internal processes: your client may use their own internal processes to assess your tax status. However, this is how certain organisations have come to blanket-assess all their PSC contractors as ‘inside IR35’.
- HMRC’s ESS Tool: HMRC issued an ‘Employment Status Service’ tool, or ESS tool, that goes through a checklist in a series of questions based on the assignment that will come out with three possible answers: ‘intermediaries legislation does not apply’, ‘engagement should be classed as employed for tax purposes’, or ‘unable to determine the tax status of this arrangement’.
- Tax status specialist: Your client may use a tax status specialist to assess your tax status based on your contract terms and working practices.
You and your agency should keep a copy of documentation proving the results of your contract’s IR35 assessment for future reference. There is no provision for appealing an IR35 status decision, and some contracts could come with the IR35 status pre determined. See the previous section for information on what to do if you are deemed inside IR35.
Agency Workers Regulation or AWR as it is more commonly referred to came into effect on 1st October 2011 and protects temporary workers hired through an agency or those working through an Umbrella Company, temp workers and contractors working through their own limited company are not affected by AWR.
The Agency Workers Regulation rule enforces that any ‘temp’ working for a company after 12 weeks, on the same job role, will have the same working conditions to that of a permanent employee in the same job, putting a whole new spin on the way ‘temporary workers’ are treated.
This means that temporary workers after 12 weeks in the same role must be treated to the same terms and conditions relating to pay as a permanent member of staff, these conditions include:
Overtime Pay & Some Bonuses
However the following are excluded from AWR:
Sick pay, loyalty bonuses, pensions, maternity and redundancy payments.
Who is affected by the Agency Workers Regulations?
This new ruling does not affect contractors working through their own limited company and who are outside IR35.
The summary table below shows if you would be affected by the scheme.
|Status of Individual||Affected by AWR|
|Supplied by temporary work
|Supplied by intermediaries e.g.
|Limited company contractors||No|
What does AWR mean for me?
Once you have successfully completed your 12 weeks qualifying period you are entitled to find out
about basic terms and working conditions. Typically you will first approach your agency who will have
28 days to inform you. If after 28 days they have not responded, you can then ask your employer
directly who then has 28 days to reply.
If after 28 days no information has been given, you can take both parties to an industrial tribunal.
There is no maximum limit to any compensation awarded to successful claimants but a minimum of two weeks’ pay should normally be awarded by the tribunal in relation to a failure to provide equal terms and conditions.
Employers under the new AWR legislation will have no choice if they take part or not. If they do try and avoid the 12 week qualifying period by rotating agency workers and changing assignments to ensure they do not meet the 12 week qualifying period, they will face fines up to £5,000.
What happens if I change agencies in between my 12 week period?
Nothing…If you were to be in the same role, but re-hired by a different agency within that time, you would still be entitled to the 12 week agency workers regulation rules. If however you changed agency and your temporary role was different you would not apply for the 12 week Agency Workers Regulations rule.
Pension Auto Enrolment
We can’t deny it anymore, we are living in an ageing population and the government has become concerned that the UK’s workforce is not putting enough away for their later years. As a result, the automatic pension enrolment scheme has come into force. It started being implemented in October 2012 and all firms should be operating under this scheme by 2018. But as a contractor how exactly will these changes affect you?
What is automatic pension enrolment?
The automatic pension enrolment scheme means it is compulsory for employers to automatically enrol all eligible employees in a pension scheme, although employees do have the option to opt out if they wish. To be eligible for auto-enrolment employees must be:
- Aged between 22 and State Pension age
- Earn more than £10,000 a year
- Work in the UK
How will automatic pension enrolment affect umbrella company contractors?
If you are contracting through an umbrella company then you are classed as an employee of the umbrella company that you are working under. Umbrella company contractors will be automatically enrolled in a pension scheme in the same way that employees will be, but you do have the option to opt out of the scheme.
For more information about contracting through an umbrella company, you may want to visit our umbrella company hub page.
How will automatic pension enrolment affect limited company contractors?
Limited company contractors may have already received a letter from The Pensions Regulator regarding how they are going to comply with the new auto-enrolment scheme. The answer will depend on the structure of your limited company, how many directors your company has and whether your company has any employees.
If your company has one director
If you are the sole director of your limited company then your company will not have automatic enrolment duties because you, the director will not be classed as an employee as you are not working under a contract of employment. You will, however, need to contact The Pensions Regulator in writing to inform them that you believe you should be exempt from pension auto-enrolment, quoting your letter code, PAYE reference and Companies House number. Once you have received confirmation from The Pensions Regulator you will be able to continue with your pension contributions as you wish.
If your company has more than one director
If your limited company has more than one director (for example a husband and wife) then the company will not have any pension enrolment duties, as long as none of the directors has an employment contract and the company has no other employees with a contract of employment. If the company has a number of directors and only one has a contract of employment with the company then the company will still be exempt from pension auto-enrolment. As above if you believe that your company does not have any pension enrolment duties then you will need to inform The Pensions Regulator in writing.
If your company has shareholders
Company shareholders are generally not on the company payroll and do not have a contract of employment with the company and so are not classed as employees. If your company has no employees then you will typically be exempt from pension auto-enrolment duties, but you will need to inform The Pensions Regulator of this in writing.
How do I inform The Pensions Regulator that my company is exempt from pension auto-enrolment?
If your company does not employ any staff members then your company will not have any pension auto-enrolment duties, as long as you meet one of the following criteria:
- You are the sole company director with no other members of staff
- Your company has multiple directors, but none have a contract of employment
- Your company has multiple directors, but only one has a contract of employment
- Your company has stopped trading
- Your company has gone into liquidation
- Your company has been dissolved
If one of the above applies to you then you will need to inform The Pensions Regulator that you are not an employer and are exempt from pension auto-enrolment. To do this you will need to contact them in writing via the email address on your letter, if you have not received a letter yet you can contact them through their
When contacting The Pensions Regulator you will need to confirm the following: