The 'intermediaries legislation' (often called IR35) 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 taxes on their income.

Currently, the intermediary is responsible for determining whether IR35 applies, and for paying tax.

However, the government believes there is widespread non-compliance with the current legislation. So, from April 2017, public sector bodies (or some third parties) will be responsible for deciding whether the IR35 rules apply and, if they do, for calculating, reporting and paying tax and national insurance contributions (including employer's national insurance).

At present, it is not clear if the changes apply only to contracts entered into (or renewed) after the April 2017 change, or extend to those in place before then.

The government has issued a consultation on some of the detail of this change.

Which public sector bodies are covered?

The government proposes to use the same definition of public sector as under current freedom of information legislation, meaning it will cover, for example:

  • Government departments, executive agencies and non-departmental bodies
  • NHS
  • Police and fire authorities
  • Local authorities
  • Devolved administrations
  • Educational establishments including universities
  • BBC, Channel 4

The consultation asks whether this definition is appropriate, and specifically whether private companies carrying out public functions for the state should also be covered.

Agencies and third parties

If a public body engages an intermediary via a third party (such as an employment agency, outsourcing company or consultancy firm) then that third party will be responsible for determining if IR35 applies and accounting for tax, rather than the public body.

New online tool

HMRC is developing a new online tool which will determine whether an engagement falls within IR35. HMRC will be bound by the outcome of the test if users enter accurate information and circumstances don't change.

What about the private sector?

For now, the rules will be unchanged in the private sector, however, the new online tool for determining whether IR35 applies will be available for private sector organisations and individuals.

Responding to the consultation

The closing date for responses to the consultation is 18 August 2016, and you can access it here.


Kathleen Morrison

Practice Development Lawyer