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Procurement Policy in Public Sector – IR35 workers at risk of losing contracts!

IR35 is fundamentally anti avoidance tax legislation which deems PAYE (and NICs) in certain circumstances.

Naturally, when senior public sector employees, including those engaged by HMRC, were found being paid through their own personal service companies answers needed to be provided at the Public Accounts Committee hearing this July (the PAC 12th Report was published on 17th September 2012).

As a result, those workers engaged by the public sector through a personal service company and not withdrawing all their income under PAYE now need to provide evidence of tax compliance within IR35 or evidence from an independent tax adviser of being outside of IR35.

Released on 24 August 2012, the unclassified Procurement Policy Note stipulates that it is now obligatory for the public sector to include a clause within subcontracts that workers must comply with providing certain IR35 assurances.

Further, reference is made in this Policy document to HMRC guidance notes – the now infamous “Business Entity Tests” – that are highly subjective and are outside tax statute.

HMRC concede that whilst these tests are “not set in stone” they are indicative of HMRC’s risk-based approach to checking compliance with the intermediaries’ legislation commonly known as IR35.

Whilst the IR35 Forum Group of independents and HMRC people have apparently devised these ordinal scale points scoring metrics to assist, many consider them to be discriminatory against small businesses who do not need expensive business premises, or set out in business to achieve more than 10% of yearly turnover bad debt evidence, and so forth.

If a “Low Risk” IR35 score is not achieved when following HMRC BETs guidance then the worker needs to produce evidence that his/her personal service company is either outside of IR35 (back to statute and case law principles) or that PAYE is being operated on the deemed payment not outside of IR35.

Those who fail to comply in supplying assurances about their tax affairs will have their contracts terminated.

As the public purse is paying, this initiative is entirely understandable. But, how much “tax” is being “avoided” and is it cost effective and practical for the public sector to sift through all contracts and invoices to determine which ones refer to personal service companies and sole traders? By following HMRC BETs guidance, many might ask how the public sector would pass the “The Efficiency test”?

Please contact Chris Leslie through our contacts page if you are a worker or a Public Sector Contractor who needs practical IR35 advice.