Public Sector Bodies and IR35 Reform

The hoped for reprieve or, at least, delay in implementation of proposals contained in the March 2016 Budget and consulted on during the summer this year has not happened. In the ‘Autumn Statement 2016: Policy Costings’ there is one page on ‘Off-payroll working: implement consultation reforms’.


This includes details of removal of the 5% allowance in respect of overhead expenses for individuals operating, typically, through personal service companies. This allowance has been part of IR35 from its inception and its withdrawal is effective from 6 April 2017 for those individuals engaged with Public Sector Bodies (PSB). The reasoning is that the allowance was needed to cover the cost of having to deal with IR35 and this expense will, from next tax year, become the responsibility of the PSB or employment intermediary through which the individual is engaged with the PSB. This is a clear message that the Government intends to keep to the schedule originally set out.

One of the main planks in the original proposals was that there would be available an on-line tool to aid the PSB or the intermediary in making a decision as to whether IR35 was in play or not. A trial version was supposed to have been ready by now, but as yet nothing has been released. Those readers who are in anyway familiar with Government IT contracts will not be surprised to read that things are behind schedule. Without a straightforward and reliable way of making a status decision about a contract, it’s likely that most PSBs and intermediaries will make a fail-safe decision and decide, in all but the most extreme cases, that PAYE and NI should be accounted for.

Apocryphally, contractors have already started to desert the public sector, or have demanded significant rate increases to offset the perceived higher tax cost. The impact assessment in the Autumn Statement documents does acknowledge that there is some uncertainty in the projections of the enhanced tax income due to behavioural factors. There is no doubt that introducing these changes within the public sector will lead to a skewing of the market and whilst the tax take may be enhanced, Government costs may rise, cancelling out any additional income.

Of course, these reforms, currently limited to the public sector, may be the thin end of a much larger wedge driven into the whole of the contractor market and we may see these rules rolled out much further. There is some logic in restricting initial roll out and certainly, if a new on-line tool is to be trialled, it needs to be done within a discreet group who can be guaranteed to use it. Any new IT system when it is introduced is usually run in parallel with the existing system to allow the elimination of bugs, but that does not seem to be the case here.

More details will become apparent when the draft 2017 Finance Bill is published early next month, but until then there will be many contractors who will be concerned about possible drops in their income levels and will be considering the possibility of transferring their skills to the private sector.

Should you have any specific questions regarding how these changes will affect your organisation please email or call 01462 687 333 and we will help you understand your position.

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