Change to payroll for Public Sector Workers – the impact so far

Around summer 2016, I made a comment in one of our board meetings which I soon came to regret. The umbrella industry had just suffered major upheaval with the removal of Travel & Subsistence relief for home to work travel. Many had been predicting the complete death of umbrella but we had survived, and more than that we were seeing significant growth.

The Travel and Subsistence amendments had come after a barrage of industry change from AWR, to anti-offshore and false self-employment legislation.

So it was that I rashly predicted a Government fully occupied with BREXIT in the months to come, would surely leave our industry alone for a year or two enabling us to bed-in the changes so far.

Change to payroll for Public Sector Workers – the impact so far


How wrong! Anybody involved with the supply of workers to the public sector will by acutely aware of the new legislation that has come into force from 6th April regarding these workers. So what has happened and why?

Historically successive Governments have supported entrepreneurialism with lower taxes for those who set up their own small businesses, compared with employees. This seems fair compensation for the risks taken by those small businesses and because employed workers receive far more statutory protection than non-employees.

Things started to change around 1999 when HMRC became concerned that employees were incorporating their own companies in order to ‘pretend’ they were small businesses and access tax benefits.  Hence the introduction of IR35 – a set of rules designed to ensure that, regardless of what the contractual arrangements might be, if a worker acts as an employee then they should be taxed like one.

Problems with IR35 developed as real life scenarios came before the courts. Some were successful for HMRC and some not. A body of case law developed that was so complex, specialists could dedicate a whole career to it.

For HMRC there seems to have been a further issue – the initial decision on whether IR35 applied sat with the worker and their limited company. The very worker who would benefit in tax terms from deciding they were outside IR35.  That can be the only explanation for the new changes.

The new legislation moves the responsibility for deciding the worker’s IR35 status to the end client, rather than worker and their company. Getting the decision wrong can result in the end client bearing the risk/cost for any missing tax.

Much has been made of the online tool that HMRC have provided in order to assist end clients and contractors with finding their IR35 status. Quite how they were going to distil years of complex case law into a few online questions raised a few eyebrows and the end result has come in for a degree of criticism from industry bodies, but in our experience the tool is a bit of a ‘red herring’.

Unsurprisingly end clients are not willing to get into the complexities of IR35, especially when they carry the risk. Over recent months, there has been a general trend of public sector end clients declaring that all workers are Inside IR35 – they should be taxed as employees.

Without confirmation from the end client that the assignment is Outside IR35, it leaves recruitment agencies with limited options:

  • Reducing the contract rate to account for employers NI and the apprenticeship levy and then deducting tax (under a Basic Rate tax code) and NI before paying the net salary to the workers company.
  • Reducing the contract rate to account for employers NI and the apprenticeship levy and then deducting tax and NI before paying the net salary via the agency’s own payroll. This also means taking on full employer responsibilities for the worker as a result.
  • Engaging with an intermediary, such as a compliant umbrella company, that ensures that PAYE is operated in full and therefore outside the scope of the legislation.

Consequently, we have seen unprecedented levels of enquiries for umbrella company services over the past few weeks.

Many contractors are extremely unhappy at the significant additional tax burden, potentially reducing their take home pay by 15-20%. The Government might claim that these contractors had been avoiding paying the right tax and NI in the first place, but this is certainly not true in all cases.

In our experience contractors are now reacting in a number of ways, including:

  • Pushing towards private sector work, as they feel the rewards are greater.
  • Leaving the country to do assignments elsewhere, waiting for the NHS or other public body to increase the rates or assess their role as Outside IR35.
  • Chasing perm jobs, of which there is only a finite number
  • Giving up contracting, as the benefits had been reduced
  • Burying their head in the sand, hoping for a last minute reprieve
  • Pragmatic acceptance of the situation and agreeing to the alternatives

Matthew Huddleston - Managing Director of FPS Group

From HMRC’s perspective, the legislation must seem a masterstroke. Agencies and end clients are now enforcing the very IR35 rules that HMRC struggled to apply for over a decade and a half. Conversely though, the changes may well place pressure on public sector clients to increase pay rates in order to secure quality talent and may well be harmful to the already struggling NHS, local authorities and other public bodies.

As for the future, well I’ve now given up making predictions, but how long do you think it will be before these provisions are rolled out to the private sector in the name of fairness or levelling the playing field?

About the author: Managing Director Matt Huddleston BSc, FCA has worked at FPS Group for over 13 years having trained and qualified as a Chartered Accountant with Ernst and Young. Matt attributes the major success that the group has enjoyed in payroll services over more than 20 years entirely to the dedication, hard work and exceptional industry knowledge of the colleagues it is his pleasure to work with.  


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