What are the payroll options for contractors working in the public sector?

A summary of the changes to off-payroll legislation in the public sector

The government has gone ahead with the changes to off-payroll legislation in the public sector that were first published in the 2016 Autumn Statement. Contractors who are working for a public sector organisation are no longer able to determine their own IR35 status. This is now the responsibility of the client. HMRC has released an online IR35 tool specifically designed to help public sector organisations identify the IR35 status of their temporary workforce.

Whilst this may sound like good news for recruitment agencies, there is more to the legislation changes than meets the eye. Although it is the client’s job to determine the IR35 status of their contractors, recruitment agencies that pay their candidates via a personal service company must make the correct tax and National Insurance Contributions (NIC) on their behalf. If HMRC were to investigate payments received by a contractor, the business that paid their wages will be held accountable if there has been any wrongdoing.

For example, if the public sector client wrongly tells a recruitment agency that ‘Contractor A’ is outside IR35 and ‘Contractor A’ is paid accordingly, the recruitment agency could be held accountable for paying ‘Contractor A’ incorrectly and could face a serious penalty. The client that made the incorrect IR35 assessment will not face any backlash from HMRC.

How has the recruitment industry reacted to the changes?

As expected, the recruitment industry is concerned with the changes to off-payroll legislation in the public sector because of the liability they are faced with when paying their candidates’ personal service company. Recruitment agencies are reluctant to pay their candidates who are deemed as outside IR35, in case the client’s assessment is incorrect. In some cases, recruitment agencies are only paying their candidates as if they are inside IR35, regardless of the contractor’s actual working circumstances. This means that a lot of public sector contractors are being paid less than they should be.

How have public sector organisations and contractors responded?

The new legislation has significantly impacted contractors and businesses in the public sector. The changes have already resulted in some public sector organisations altering the way they interact with contractors. For example, Transport for London confirmed they will no longer engage with contractors operating through a personal service company. The Ministry of Defence is another organisation that has changed the way they work with contractors. They now consider every temporary worker they hire as inside IR35 and as a response, a majority of their temporary workforce decided to terminate their assignments and find work elsewhere.

Using an umbrella company may be the best option for all parties

Public sector organisations are unlikely to object to their contractors being paid through an umbrella company because the administration is minimal and there is no need for an IR35 investigation. This is because self-employed workers using an umbrella company are paid PAYE in the same way as full time employees (the same as if they are inside IR35).

As a recruitment agency, having your public sector candidates use an umbrella payroll provider is ideal. The umbrella company will be the body that pays your candidates, removing any liability that you may have had if your candidates were working through a limited company on your agency payroll.

Whilst an umbrella company may be the best option for recruitment agencies and public sector organisations, it is not the payroll service to use if your candidates want to legally maximise their take home pay. However, in the public sector, it may be the only payroll service that some clients will accept.

Paying a contractor’s limited company does not necessarily put risk on your recruitment agency

To legally maximise their take home pay, the best solution for contractors outside IR35 is to work through their own limited company (personal service company). However, as already mentioned, determining the IR35 status of a contractor in the public sector is complex. This has resulted in several public sector organisations deciding their contractors are inside IR35, regardless of the actual working conditions. By taking this action, contractors in the public sector with a personal service company are not receiving the take home pay they once did, making the concept of working in the public sector less attractive.

If some of your candidates are in the public sector and are outside IR35, make sure you have interacted with their client and discussed their IR35 investigation process. The accuracy of the IR35 review is critical. After all, your candidates who are genuinely outside IR35 pose absolutely no risk to your agency whatsoever, assuming they have been correctly assessed.

If you have any doubts about the IR35 assessment your candidates have received, you should have a look at the HMRC online tool yourself and encourage your candidates to have an official IR35 contract review from an industry specialist such as Bauer and Cottrell.

Choose a reliable and established payroll provider for your candidates

Churchill Knight & Associates Ltd has been working with contractors in the public sector since 1998. Our specialist contractor services include accountancy and umbrella PAYE payroll. Whatever your candidates require – we have a fully compliant solution.

For more information, please contact our dedicated Agency Consultants on 01707 671645, or email agency@churchill-knight.co.uk. Our experts are fully up to date with the latest industry legislation and are on hand to provide you and your candidates with the level of support required.