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New IR35 rules for public sector contractors

From 6th April, public sector organisations and agencies will be responsible for collecting PAYE from any contractors who use an intermediary and are affected by revised IR35 rules.

Recent research carried out by Qdos Contractor found that 85% of public sector contractors would leave their roles if they were caught inside IR35 after 6th April. Qdos’ research also revealed that most of the 2,000 UK contractors surveyed believe that Government departments will bear the brunt of this potential departure.

What is IR35?

IR35 is anti-avoidance tax legislation designed to tax people who put their contracts through a Personal Service Company (PSC), at a similar rate to those in regular employment.

HM Revenue & Customs (HMRC) considers the use of PSCs as "disguised employment" and, having had limited legal success challenging this type of contractor using the previous IR35 rules, it is introducing the revised legislation.

What will change?

The new IR35 rules will come into effect from April 2017, but will initially only apply to the public sector and those contractors working through PSCs providing services to it.

Key changes

  • Determining whether a contract falls within IR35 will shift from the contractor to the public-sector client.
  • If a contract is deemed to be outside IR35, the contractor continues as before. It will be the agency or public sector client’s responsibility to foot the bill if the decision is later overturned by HMRC.
  • If a contract is inside IR35, the agency or public sector client must deduct PAYE and NI before paying the contractor. The latter may still be able to operate through their own company but will be taxed as an employee. Various tax credits will be in place to prevent the contractor paying tax twice when their PSC receives the income.
  • There is little time to deal with these changes and there is evidence that agencies and public sector bodies are forcing contractors either inside IR35 or to work through an umbrella company. Ultimately this could mean substantially less ‘take home’ pay for contractors.

Options to consider

Not all the below options will necessarily be available and the contractor will need to consult with their agency or public sector body to see what options are available. These include:

  • Continue as a PSC under IR35 – PAYE will then be applied and there will be no 5% deduction, which is normally allowed when a contract falls under IR35.
  • Use an umbrella company – where PAYE will be applied and the umbrella company will employ the contractor under an over-arching contract of employment. They will then engage with the recruiter or end client under a business to business contract.
  • Become an employee of the public sector body.


Call us today on 0800 0523 555 or submit an online enquiry here to arrange an appointment with your local TaxAssist Accountant.


Is working through a limited company inside IR35 still beneficial?

There are still instances where using a PSC is beneficial:

  • Some umbrella companies charge more than limited company accountancy fees. As such, the contractor may be no better off using an umbrella company.
  • With a limited company, payments are made to the PSC’s bank account. With an umbrella company, the money is initially paid to the umbrella company and then paid to the contractor. Be aware there have been instances where umbrella companies have got into financial difficulty and payments not passed on.
  • The contractor can use their limited company for other assignments outside IR35 in the private sector.
  • Working through a limited company inside IR35 may still prove to be the best option depending on individual circumstances

Employment status

HMRC has created a tool to determine if the IR35 rules apply to an engagement. The tool was released on 2nd March and can be found by clicking here.

Contract review

If an agency or public sector body takes a sensible approach to the rules and the contractor is genuinely trading outside IR35, they should be able to continue operating as usual.

However, if the agency has asked if the rules should apply to your company, TaxAssist Accountants can put you in touch with service providers, who will be able to give an expert opinion on your circumstances.


The new IR35 rules apply to payments made on or after 6th April, so will include any prior work delivered but not yet paid for. The UK’s contractor trade group, The Association of Independent Professionals and the Self-Employed (IPSE) has warned public sector contractors to seek payment due before 5th April.

We would advise a contractor to urgently discuss this with their public sector client and seek assurances that relevant payments will be paid before the new rules take effect.

Next steps

There remains some uncertainty as to how the new rules will work in practice and how public sector bodies will respond. We would advise to avoid making any rash decisions.

If you require further information or think you are going to affected by the revised IR35 rules, contact your local TaxAssist Accountant, on 0800 0523 555 to arrange a free, no obligation meeting to discuss the available options. Alternatively, submit an online enquiry here.

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