Although changes to the intermediaries legislation (IR35) have been expected, the government’s announcement at Budget 2016 has confirmed that these changes will now be limited to public sector engagements only. With effect from April 2017, individuals working through their own company in the public sector will no longer be responsible for deciding whether IR35 applies. Instead, the responsibility will move to the public sector employer or, where relevant, to the party closest to the worker’s intermediary in the relevant contractual chain. Where it has been determined that the engagement falls within the scope of IR35 (assisted by the introduction of clear, objective tests and digital tools designed to provide real-time feedback on HMRC’s view of the engagement), the public sector employer (or relevant third party) will be obliged to operate PAYE in real-time on the payments it makes to the worker’s intermediary company and will also be required to account for the associated employer national insurance liability.
Clearly there is political currency in targeting public sector bodies, who the government rightly point out have a responsibility to taxpayers to ensure that the people working for them are paying the right taxes. However, the same can of course be said of all engagers. Given that public sector engagements will only make up a small proportion of those falling within the scope of IR35 it is difficult to see how the announced changes deliver on the aims set out in the government’s summer 2015 discussion document of making the IR35 legislation “more effective in protecting the Exchequer and levelling the playing field between direct employees and those who work in a similar manner to direct employees but through their own limited companies.” However, limiting the changes to IR35 to only public sector bodies does address the concerns raised by business regarding the burden of operating payroll generally for personal service companies.
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