IR35 and Public Sector

We have recently been advising a Public Sector body on the impact of the new rules on IR35 applicable to payments from a Public body (“the Client”) to an intermediary between the Client and the worker. It seems that the impact of this could be significant.

At one level little appears to have changed. HMRC required PAYE to be accounted for on payments from a Client to an Intermediate if certain conditions were met. The key condition was if the relationship between Client and worker was such that had there been no intermediary, then the direct relationship would have been one of employment. That is still the test so what is the concern?

The answer is that the obligation to pay the PAYE has shifted from the intermediary (usually a personal service company) to the Client. So the Consultant can no longer give themselves the benefit of the doubt – it is the Client which makes the decision and takes the risk.

The initial problem is for the worker – in that public sector bodies are likely to be risk averse and will want to apply PAYE wherever there is the slightest doubt. This reduces the expenses which can be claimed – the tax planning for dividends – and the pension contributions that can be made before NIC is deducted on a net figure of salary. This much has been well rehearsed – and is indeed the point of the change in legislation.

However it seems to me that there could be significant problems for the Client as well. A decision to deduct PAYE is an acceptance that this person would be an employee if not for the insertion of the intermediary into the relationship. If a worker sues for employee related rights – and the Client had made the engagement conditional upon using an intermediary – is the clear evidence that the Client accepts that the underlying relationship is employment not sufficient to persuade an employment tribunal that the worker is just simply an employee – with the rights that go with it.

Secondly it is not clear that the status of being an intermediate where the Client deducts PAYE has any real attraction to a worker. They pay employees tax rates with self-employed protection rights. In fact it appears likely that the tax position is worse than many employees – since pension contributions do not appear to be allowed as a deduction in calculating the Direct Payment on which PAYE is charged – so NIC Is charged.

If there is no benefit then such a worker would be better off on a zero hours employment contract. If that is not on offer then the public sector is likely to struggle to compete for scarce skilled workers.

It is also fairly poor – that a public sector body engages an individual who they accept is working as if they were an employee – but they refuse to allow them the rights of employees which parliament imposes on private sector employers.

It is difficult to see how most Public Sector organisations can take this risk. There is some reporting that many are just insisting on workers using umbrella companies.