At the IR35 Forum meeting in January 2013, HMRC confirmed that they are scrutinising off-payroll arrangements in the Public Sector and no job titles are to be considered “safe”.

Specific examples of locum solicitors being investigated were discussed during the meeting and it makes commercial sense for HMRC to review higher paid consultants to gain a greater yield of tax. HMRC have targets to meet after all!

IT contractors are also potential targets for HMRC along with other highly skilled professionals.

Is it significant that public sector contractors are subject to scrutiny at the moment?

There is a double whammy for higher paid contractors working in the public sector. Not only will the contractor face a financial penalty if incorrect tax is paid on income generated from the public sector client, but the end client (I.e. the public body engaging the contractor, whether that be the NHS Trust, government department, local council or other publicly funded body) may also face a financial penalty. This certainly helps with HMRC’s targets!

So, what does the public sector client have to do to protect itself from incurring a financial penalty?

Public sector bodies are required to undertake appropriate checks on all consultants engaged “off-payroll” (I.e. those it pays gross, without deduction for PAYE) for more than 6 months on more than £220 per day. Details of the necessary checks are below.

What penalties does the client face?

Public sector clients who do not carry out the necessary checks on ‘off-payroll’ contractors face a fine of up to 5 times the tax and national insurance contributions which would have been payable had the contractor been engaged on the client’s payroll.

This penalty is in addition to the penalty which the contractor may face in the event of an IR35 investigation. So HMRC could ultimately recover 6 times the tax and NICs due, plus penalties and interest – not an insignificant heist by anyone’s standards!

The magical “6 month” timeframe

If a contractor is engaged on a month to month basis, the public sector client may choose to carry out its checks at the end of month 5 when it knows the engagement will continue beyond the 6 month mark.

Alternatively, where it a contractor is engaged under a contract which is intended to last more than 6 months, the client may choose to undertake the checks either in month 1 or month 6.

During February 2013, many contractors will see requests from public sector clients for these assurances. This is simply because contractors engaged from (or before) August 2012 must have checks carried out by February 2013 (6 months after HM Treasury’s Required Assurances Directive was implemented) and we expect most clients to wait until the last minute to implement processes to comply with these requirements.

What checks need to be undertaken?

Public sector bodies need to ensure that its off-payroll contractors are paying the appropriate amount of tax for the circumstances of their engagement. This requires the client to obtain the necessary “assurances” from the contractor that either:

• The contractor has used HMRC’s contract review service and has an opinion which says the contract supports a self employed arrangement (rather than an employment relationship between contractor and client);
• The contractor has taken professional advice as to the status of their contract which confirms it supports a self employed arrangement (rather than an employment relationship between contractor and client);
• The contractor has taken the business entity tests and is ‘low risk’;

Clearly most contractors would prefer not to involve HMRC in this review if possible.  To do so may mean they inadvertently prompt an enquiry into their tax arrangements.

Most contractors are unlikely to achieve a “low risk” score under the business test, but this does not mean that they are not self employed.

So, the best option for public sector contractors is to take professional advice from IR35 specialists (such as Muftals). This enables contractors to gather the information required to satisfy their client and get expert advice in relation to IR35 to ensure they keep their business safe moving forward.