**Update** The government announced in the Budget on 22 November 2017 that it would consider extending the IR35 changes to the private sector. A consultation was launched on 18 May 2018.

Intermediaries legislation (often called IR35 or'off-payroll rules') is designed to ensure that individuals providing services via an intermediary (such as a personal service company, individual or partnership), who would have been taxed as employees if they had been engaged directly, pay employment tax in a similar way to employees.

Historically, the intermediary has been responsible for determining whether IR35 applies and, if it does,for paying tax and national insurance contributions through PAYE on the basis that the consultant is an employee of the company.

The rules were changed for the public sector in April 2017 and now the responsibility for determining whether IR35 applies, and paying tax and NICs if it does, sits with the public-sector employer, not the intermediary. HMRC produced an online tool to assist public bodies in assessing whether IR35 applies.

The public body must inform the intermediary, agency or third party with whom they have a contract whether or not the contract falls within the off-payroll rules. If it does, the public body will be responsible for calculating, reporting and paying tax and NICs (including employer's national insurance), unless the public body engages the intermediary via a third party (such as an employment agency, outsourcing company or consultancy firm), in which case these responsibilities will fall on that third party.

This was a significant shift in practice for public-sector employers engaging contractor services. Last month, the Treasury reported that public bodies added 90,000 people to their payroll in the three months from April to June 2017, most of whom had been working as contractors. HMRC expects to reap an extra £265m in the current tax year as a result of the change.

This has led, not unexpectedly, to reports that the Chancellor is considering that the public sector IR35 rules could be extended to the private sector. This may form part of the Autumn Budget.

Changing responsibility for IR35 assessments in the private sector has huge potential consequences. As well as the possibility of increased PAYE and NIC costs, employers would face a number of additional administrative tasks such as having to identify where contractors are engaged by the organisation; managing the transition arrangements for those caught by the rules; and liaising with employment agencies and umbrella companies.

If the Chancellor's proposal does form part of the Autumn Budget, Brodies is well placed to provide practical advice having helped a number of public sector clients through the process. Please get in touch with your usual Brodies contact should you wish to discuss anything at this stage.


Julie Keir

Practice Development Lawyer