Changes to contracting in the public sector

Find out the latest developments in this area

Contracting in the public sector - Update

As many contractors will know, there will be a change to the way that agencies and end clients deal with payments to some contractors who work in the public sector, with effect from 6th April 2017.

Scope of the change

Currently, it is up to the individual contractor to consider and apply (where necessary) the intermediaries’ legislation (commonly known as IR35). From 6th April 2017, public sector bodies will now be responsible for identifying and reviewing the employment status of all contractors engaged through personal service companies (PSCs), including those provided via an agency.

Where, in the absence of the PSC, the worker would have been regarded as an employee of the public sector body (under the IR35 rules), the public sector body or agency will now be required to treat payments made to the PSC as if the worker was employed by the public body.

This means the public sector body or agency will be required to account for PAYE and National Insurance to HMRC on the deemed employment payments made to the PSC.


You should note that if your engagement is deemed to be outside of the IR35 legislation by the public body, there will be no change to how your company currently receives its sales income.

HMRC online tool

To assist the public body in determining the status of the contractor in terms of IR35, HMRC have designed an online tool. We believe that the public body will answer questions about the engagement and the tool will then advise them as to whether the engagement is inside or outside of IR35. We are hopeful that the public body will allow some input from the contractor when using the tool.

We do, however, have reservations as to how accurate this tool will be and also have concerns that, as it was designed by HMRC, it will calculate the result based on HMRC’s interpretations of the law, which are unlikely to be impartial! At this stage, we are unsure as to whether the public body will accept third party evidence as to the IR35 status of an engagement, e.g. a contract review by an independent third party.


If your company is VAT registered, it will continue to charge VAT on your sales income to the public body/agency even if you subsequently have PAYE and NIC deducted.

Personal income

If you are subject to the new rules, you will continue to take your personal income from your company in the form of salary and dividends.

Although the mechanics of the new rules are quite complicated, they are designed to ensure that the tax deducted by the agency/public body is relieved against any personal tax and national insurance due on your salary and dividend income (from your PSC). This means that you should not be taxed twice on what is effectively, the same income.

So where are we at today’s date?

Unfortunately, there is still much uncertainty in respect of how these rules will be operated in practice.

We have noticed increased activity by agencies over the last couple of weeks in terms of gearing up for these changes and communicating with their affected contractors.

HMRC have not provided a great deal of time for agencies to implement the changes so we feel that the actual practical workings of the new rules will not be known for a while yet, perhaps even after the 6th of April, which seems ridiculous!

We eagerly await further updates from HMRC on this subject…

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