For this purpose the definition of public sector is broader than you might expect, it encompasses not only government departments and agencies but also any organisation covered by the Freedom of Information Act. This means that universities, the BBC and some other seemingly non-governmental organisations are included within the scope of the public sector rules.
Under these rules it is now the responsibility of the “fee payer” – that is the organisation which pays the contractor – to determine the contract’s IR35 status. The legislation that introduced these changes requires the fee payer to make a decision uniquely for each contract, however it also places financial penalties and burdens onto the engager in the event of incorrectly finding a contract to be outside IR35. As a result of this there are three things to look out for when negotiating a public sector contract.
- Blanket decisions – While engagers are supposed to judge each contract on its specific terms and working practices, in many cases this is not happening and decisions are being made on a departmental level to consider all contracts to be inside IR35. There have been rumours that this is often due to political pressure from the Treasury. If you find yourself affected by this, remember that the law says each contract should be assessed on its own merits, and that you have a right to be told the reasons for that decision within 31 days of making a written request.
- Over-cautious fee payers – Due to the onerous penalties for incorrectly determining a role as outside IR35, some fee payers are playing it safe by starting with the assumption that roles are inside. This is because there is no penalty for incorrectly placing someone inside IR35. If you think this has happened then make sure you get a written explanation, and challenge the decision.
- Some engagers are side-stepping the whole issue of IR35 by refusing to enter contracts with PSCs. This is because the Intermediaries Legislation does not apply to umbrella company employees. Unfortunately they are within their rights to do this. In this case your options are to refuse the contract, work through an umbrella or attempt to take on the role through a consultancy.
Your client will pay your invoice gross. It is your responsibility as the director of a PSC to determine for each contract whether the role is inside or outside IR35, based on the relevant criteria. If you are inside IR35 then you will need to operate “deemed payments” for turnover from that project. Remember that IR35 applies to contracts, not to companies or individuals, so you should consider your status again each time you begin a contract.
Making your determination
As a contractor working in the private sector you should make a determination for each role you take on as to its IR35 status. To help you do this there are two options. The first option is HMRC’s online “Check Employment Status Tool” (CEST). Whilst not compulsory, using this free tool has one significant advantage in that HMRC have pledged that they will accept a result obtained from CEST, so long as the information entered to obtain it is accurate. The second approach is to obtain an IR35 review from a professional. Many accountants and a few specialist firms offer this service. Whilst it is not free like CEST, you are paying for a thorough and bespoke assessment, and will have a documentary paper trail to demonstrate that you exercised due diligence in making your determination.
Whichever approach you take, your status is based on several factors, which add up to the basic question, if your limited company did not exist would you be an employee of the client? This is assessed by looking at your relationship with the client, the way in which you receive instructions and feedback, whether you are required to do the work personally or have a right to use a substitute, and whether you take a financial risk in fulfilling the contract.
With care and forethought it is possible to set up your business and your relationship with the client in such a way that any contract is more likely than not to be outside IR35. Our guide to working outside IR35 can help you do this.