On 6 April 2017 the government made changes to IR35 and off-payroll working rules for public sector contractors. This has completely changed the tax landscape for those employing contractors in the public sector through an intermediary.

Impact of the changes

The reason that the changes are so significant for those employing contractors in the public sector through an intermediary is because, if they fall within IR35, the burden of paying any employment taxes now falls on the public sector body, rather than the intermediary.

What are the changes?

Previously, when contractors were employed by a third party through an intermediary company, the intermediary was responsible for the employment taxes of the contractor if the relationship between the contractor and the third party was one falling under IR35, meaning there was a relationship akin to an employee/employer one. The existence of an intermediary gave a level of protection to the third party and in most cases they would simply make a payment and do very little else.

In a huge shift for the public sector, the government's changes are as follows:

  • the responsibility for determining the intermediary's IR35 status has moved from the intermediary to the third party public sector body or staffing agency engaging the intermediary
  • there is now a positive obligation on the public sector body to identify any intermediary it uses and to make a decision on whether the contractor being supplied by the intermediary is an employee and/or office holder
  • after establishing the status of the individual engaged by the intermediary, it will also be the responsibility of the public sector body to deduct and pay employment taxes and National Insurance contributions (NICs) to HMRC. For tax and Class 1 NICs purposes the public sector body will therefore be treated as an employer. Importantly though, they will not have to provide employment rights such as holiday or sick pay to the individual.

Who is effected by the changes?

The definition of a public sector body is extremely wide and includes all public sector organisations covered by the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002. This includes:-

  • government departments, executive agencies and non-departmental public bodies
  • the NHS
  • police and fire authorities
  • local authorities
  • devolved administrations
  • educational establishments, including universities
  • the BBC and Channel 4
  • the Bank of England

It is important to note that the legislation has been drafted in such a way that companies owned and controlled by public authorities and government agencies will also fall within the off-payroll legislation. Businesses to which services are contracted out by public authorities do not fall within the new rules.

How to identify whether the rules apply

HMRC have created an online tool - the employment status service (ESS) - to assist in establishing the status of the individual supplied by the intermediary. Although there is no obligation to use the ESS, in practice, given the need to determine the status of a large number of workers, it is likely to be the default option for many organisations. Furthermore, it has the added advantage that HMRC has confirmed that it will be bound by the outcome of the test, provided that the data has not been manipulated to reach the result by fraudulent means.

Information required

It is the responsibility of the intermediary to provide the public sector organisation with the relevant information they need to assess whether or not the deductions should apply. The information will include:

  • Full name.
  • Date of birth.
  • National insurance number.
  • Bank account into which the payments are to be made (this should be the account of the intermediary).

Impact for contractors

Having determined the individual's deemed employment status, the public sector organisation must inform the contractor of the outcome of the review and, if requested, provide a written response as to how the conclusion on employment status was reached - at the very least, it would be best practice to send the contractor a copy of the ESS questions and responses.

In the case of ongoing contracts, this must be done before the due date for the first payment under the contract on or after 6 April 2017. For new contracts starting after that date, status should be determined before services are performed under the contract and, ideally, before the contract is signed.


It is difficult to say how the rules will be applied generally, but there is a consensus that many more public sector intermediaries will be deemed to be inside IR35 with bodies taking the safe route to ensure the intermediary is categorised correctly.

Public sector bodies will need to consider amending procurement processes, contractual arrangements, payment processes and policies to ensure compliance with these changes.

Finally, given the changes are likely to increase taxable revenue, it is not a great leap to predict that similar rules for the private sector will follow at some point in the not too distant future.