Yesterday the government published its Finance Bill, which contained a number of amendments, including one that for the first time makes the public sector hirer liable if they do not take “reasonable” care when taking a decision as to whether IR35 applies.

The amendment has been made to new rules, set to come into force next month, that make public sector end clients responsible for determining whether a worker who operates through a personal service company or other intermediary is caught by IR35 or is genuinely self-employed. Where the worker is caught by IR35, the new rules would also makes the fee payer, who will often be a recruitment agency, responsible for deducting and then paying the worker’s tax, National Insurance and employer’s NI.

The Association of Recruitment Consultancies (ARC) chairman Adrian Marlowe welcomed the amendment, adding the rules making agencies liable for IR35 contractor tax was “heavily flawed” without this adjustment.

However, Marlowe warned: “Even now the arrangement still has loose ends in that the hirer only has to inform the agency of the IR35 status before the contract starts and there is no mechanism in the event of subsequent adjustments to the arrangements, therefore still leaving the agency exposed in those circumstances. But the inclusion of this care test along with strict time limits, coupled with a transfer of liability in the event of hirer breach, now passes the ultimate liability quite correctly back to the hirer.

“The legislation still leaves much to be desired as it has the effect of charging a 13.8% employer NICs amount onto the agency, and adds on an Apprenticeship Levy charge where the agency payroll exceeds £3m per annum. These charges are unfair, particularly given the potential impact on current contracts, the lack of transitional provisions and the administrative effort required to address what could amount to a very significant loss for agencies.

“The impact on public sector hirers has yet to be fully seen, as I regularly read reports that contractors are pulling off site and/or are charging higher rates, none of which can be helpful with key government projects that have already been costed, such as HS2 [high-speed rail project]. 

“As we progress into the post Brexit era, ARC would prefer to see a more joined up approach at government level, and what is really critical is the need for government to consult more fully with our industry at the point of policy making, not months or years thereafter.”

Also commenting on the changes, Julia Kermode, the CEO of the FCSA, a trade association for umbrella employers and accountancy providers, said she is pleased that HM Revenue & Customs has listened to FCSA’s concerns and made appropriate amendments to the Bill.

“It will be interesting to see how the new legislation works in practice, particularly on the onus of the public sector hirer taking reasonable care when it comes to determining status and if any public sector bodies will become the feepayer in reality. Notwithstanding, this provision is good news overall as it should avoid ‘wholesale’ approaches of hirers deeming all contractors to be inside IR35.

“6 April is only a matter of weeks away and the impact of the legislation is still going to be significant. I would like to remind HMRC that none of these IR35 changes would have been necessary if HMRC had enforced the original IR35 legislation over the last 17 years.”

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