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Emergency action plan for public sector bodies affected by IR35

Public sector bodies (PSBs) may need to take emergency action to avoid losing contractors as a result of the IR35 reforms. This comes after recent HMRC guidance confirmed that invoices paid after 6 April 2017 for work carried out before that date will be subject to the new rules.

This means PSBs who pay their contractors one month in arrears will need have invoices issued to them before 6 March, whilst those who pay their contractors on anything more than 60 day terms will need to consider settling invoices before 6 April.

If after 6 April you can’t provide proof to your agency that your contractors are outside IR35 and that you have conducted your due diligence, the contractor will have tax and National Insurance Contributions (NICs) deducted at source.

Does your organisation need to take emergency action right now?

Contractors trading outside IR35 won’t welcome this sudden tax hit, with many expected to walk. If you haven’t already done so, your PSB needs to start their compliance procedures as soon as possible to mitigate this risk.

For contractors paid a month in arrears, all contracts need to be IR35 tested prior to 6 March. If you haven’t prepared for this, you may struggle to assess all of your contractors in time. In which case you’ll need to take swift action. Here is our emergency action plan for PSBs.

Use PAYE umbrellas as a temporary solution

To help rule out the threat of a contractor skills brain drain, you should temporarily place your limited company contractors in a Pay As You Earn (PAYE) umbrella solution. Your recruitment agencies can assist choosing ones that operate compliantly.

Your contractors are highly unlikely to accept a temporary tax hike without protest and many will consider leaving. To protect your skills base, you will need to offer them a 20% fee increase to ensure they retain a similar level of net pay after taxes.

Remember, this is only a temporary measure whilst you assess their contracts. The costs incurred by ramping up contractor rates are an expense that’s necessary to retain their valuable skills.

IR35 test your contractors ASAP

Don’t forget, engaging a contractor via an umbrella for more than 12 weeks means they will be eligible for certain employment rights under the Agency Workers Regulations (AWR), including paid holiday leave and maternity benefits.

This will create additional costs for your organisation, and emphasises the need to have all contracts assessed as soon as possible. Manual-based testing could take weeks to complete, whilst HMRC is yet to launch its dubious Employment Status Service (ESS) tool. You need to adopt a more efficient solution.

Our new IR35 testing tool can help you

Our new version of the IR35 test (released on 7 February) is a fully automated solution that can test thousands of contractors in a matter of hours - and it's FREE for every contractor to obtain an instant assessment on their pass/fail status. Other key features of our tool include:

  • Used by over 100,000 contractors since it was first built in 2009
  • Expanded to 101 questions to provide the most comprehensive and in-depth IR35 evaluation available
  • Shows IR35 risk on a 19 point scale so contractors know exactly where they stand
  • Contractors can purchase a detailed IR35 Test Report that includes extensive compliance recommendations that helps to reduce their IR35 risk

The tool is freely accessible for contractors to take the test and obtain an initial result. We also offer white label options to enable you to get access to reports, and provide group reporting on all your resources. If you would like to find out more, please contact the team.

Negotiating contracts outside IR35

Once each contract has been IR35 tested, you can make an informed decision over whether to allow contractors who have passed to return to trading via their limited company on the same terms as before.

For contractors who fail the test, you might consider amendments to the contract and working arrangements that can minimise their IR35 risk. Involve an IR35 legal expert when negotiating contractual changes, to help ensure any amendments don’t pose any risk to your organisation.

If you cannot negotiate an outside-IR35 contract, you may wish to renegotiate with the contractor based on using an umbrella option. This could be a more straightforward alternative to operating inside IR35.

Published: Wednesday, 8 February 2017

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