IR35: Three things public-sector HR needs to know about the April 2020 reforms

NOTE: This resource was published on 3 December 2019. On 17 March 2020, the Government announced that the extension of IR35 to the private sector will be postponed by a year to 6 April 2021.

Author: Susie Munro

HR professionals in public authorities may think that the extension of IR35 reforms to the private sector in April 2020 will not affect them. However, public-sector bodies need to be aware of some proposed changes to the rules.

Reforms to the rules on off-payroll working (known as IR35 or the intermediaries legislation) are due to be extended to medium and large private-sector organisations from 6 April 2020, bringing the private sector into line with the public sector, where the new rules came into force in April 2017.

Public-sector bodies will welcome the plans to extend the off-payroll rules to the private sector, as it will help create a level playing field when hiring off-payroll workers.

Local Government Association

It is still expected that the reforms will go ahead next year, in spite of uncertainty resulting from the general election. The Chancellor of the Exchequer, Sajid Javid, has said in a radio interview that he wanted to look at the proposed changes to IR35 again; however, this was not included in the Conservative manifesto.

The IR35 rules can apply where a worker is engaged to provide services for a client via an intermediary (eg the worker's own personal service company).

The key reform is to shift responsibility for assessing the employment status of the worker, for tax and national insurance purposes, from the intermediary to the end-user organisation. If the worker would have had employee status had they been engaged directly, the IR35 rules apply and the party that pays the worker's fees (ie the client or an agency) is liable for tax and national insurance.

1. You must provide a "status determination statement" to the worker and to the party you contract with

Once a public authority has assessed a worker's status, it currently has a duty to provide information to the party that it contracts with (eg the intermediary or an agency) confirming its determination on whether or not the worker would have been an employee had they been employed directly.

HMRC encourages the use of the Check employment status for tax (CEST) tool when making a status determination. It will stand by the results given by the tool, provided that the information entered is accurate and it is used in accordance with HMRC guidance.

Under the new rules that are expected to apply from April 2020, including in the public sector, the client engaging the worker must provide a "status determination statement" directly to the worker and to the party the client has contracted with. The client must also provide reasons for its determination. The status determination statement and reasons must then be passed down by each party in the supply chain so that all parties are aware of it.

The draft legislation to bring in the IR35 reforms appears to require a status determination statement only where the client decides that IR35 does apply, ie that the worker would have had employee status had they been engaged directly. However, it would be good practice for the client to provide such a statement where it reaches the opposite decision, in particular because if it has not provided a statement, it would be liable for income tax and national insurance contributions (NICs) for the worker if it is later determined that IR35 does apply, even where liability would otherwise have fallen to an agency paying the worker.

2. You must have a dispute process in place

When the new rules come into force in April 2020, organisations will need to have in place a dispute process to deal with complaints from workers who disagree with the decision that their engagement falls within IR35.

If the worker or the "deemed employer" challenges the status determination as being incorrect, the client must consider their representations and reply within 45 days, either stating that it has concluded that the status determination is correct or providing a revised status determination.

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The aim of requiring a dispute process is to prevent risk averse clients from applying a blanket decision that IR35 applies to all their contractors. The Government has said that it has seen no evidence of this happening in the public sector since the introduction of the reformed rules and that most authorities make the decision on a case-by-case basis.

There will be no independent appeal process available to a worker, other than to take legal action. The Government has said that the client is in the best place to be able to make the status assessment and can respond to appeals "in real time", which HM Revenue and Customs (HMRC) would not be able to do if it was responsible for determining disputes.

Currently, public-sector bodies are simply required to respond in writing within 31 days to any questions about their reasons for reaching their conclusion. In practice, they may have a dispute process in place, but they should look out for guidance from HMRC, to ensure that they meet the requirements for what a process should involve.

3. Your organisation could be liable if another party in the chain fails to pay tax and national insurance

Another significant change that public authorities need to be aware of is that, if another party in the supply chain fails to pay the tax and national insurance required under the IR35 rules, the end-user client could ultimately be liable for this.

This measure is designed to ensure that organisations carry out due diligence in checking that the agencies that they work with are reputable and will fulfil their PAYE obligations. If HMRC is unable to recover the unpaid amounts from the party that has failed to meet its obligations, it will try to collect from the first agency in the supply chain. If this is not successful, liability will ultimately fall with the end-user client.

HMRC has said that it will publish guidance on what end-user clients and agencies are expected to do to show that they have exercised reasonable care, and to avoid liability for another party's unpaid tax and NICs.

The Local Government Association has said that "it is anticipated that any such liability could be minimised through ensuring robust processes and contracts are in place with agencies".