With the new IR35 public sector rules set to apply from 6 April 2017, HMRC has, with a deft hand, ensured that those agencies supplying contractors will bear the brunt of the cost and risk, regardless of whether the arrangement is considered ‘inside or outside of IR35’.

If the agency decides (whether or not following a hirer’s determination) that the project is outside IR35 and pays the PSC gross, it runs the risk that this stance may later be challenged. This challenge could occur up to 6 years after the event.

If the agency treats the arrangement as being caught and deducts the necessary taxes, this will include 13.8% employer NICs and it remains unclear where this is to be found. If it is to be taken from the amount the agency receives from the hirer before paying the worker/PSC, HMRC must be accepting that an agency can deduct employer NICs from a payroll amount. After all, save for the agency’s margin, the amount the agency receives is that which it has agreed to pay the contractor for the services. If, however, as HMRC guidance appears to suggest, the employer’s contribution cannot be taken from the agreed charge, then this amounts to a 13.8% penalty on those agencies.

Whilst it remains the case that careful contract provisions may address some of the issues, unfortunately the guidance examples provided to date are opaque as to the intended source of the employer NICs and disregard the commercial necessity whereby agencies must justify every element of their charge. It also fails to address the issue of how a PSC will fund company operating expenses and meet statutory payments such as sick pay or holiday pay, if its entire revenue (excluding VAT) is treated as employment income.

Surely this leads to the conclusion that the grounds for mounting a concerted challenge to the legislation are now indisputable?

Ben Grover
External Policy Adviser & Senior Legal Consultant