Changes to Taxation for Contractors in the Public Sector

Important changes are to be introduced in April 2017 affecting public sector bodies that engage and organisations that supply consultants and contractors in the public sector, as well as individual consultants themselves.

Important changes are to be introduced in April 2017 affecting public sector bodies that engage and organisations that supply consultants and contractors in the public sector, as well as individual consultants themselves.

Since 2000, there has been a tax regime known as IR35, applicable to "self-employed" consultants and contractors. If the relationship between the individual and the end user resembles one of employment, IR35 imposes similar obligations to pay income tax and national insurance to those of an employee.

It is currently the responsibility of the personal service company or other organisation providing consultants to decide whether IR35 applies and, if it does, to make the necessary tax and NI payments. But this will soon change. From April 2017, in the public sector, the liability to make income tax deductions will fall on the end user public body engaging the services of a consultant. However, importantly, if the end user engages the consultant through a recruitment or staffing company, that company itself will be required to make the deductions, and also to pay employers’ national insurance contributions.

This change is being implemented as part of the ongoing Government drive to crack down on relationships which it views as false self-employment, and is in line also with its wish to place limits on and reduce the use of consultants in the public sector. It extends previous Government policy guidance on the public sector use of off-payroll consultants and need for tax assurance for such relationships.

The changes will not affect the following:

1. Businesses which tender for work from the public sector, but carry out the work as private companies, where contractors are managed and supervised by the private company. In this situation, the IR35 rule is not triggered as there is no relationship of control between the end user and the contractor.

2. Staffing agencies which already have an employment relationship with their candidates, because they should already be paying tax and national insurance.

Both public sector bodies and the organisations that supply consultants to them should be preparing now for this change. For further information as to what practical steps organisations could be taking to prepare for this change, please contact Ranjit Dhindsa or James Warren or any other member of the team.