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IR35 Public Sector Reform – what recruiters need to know

legislation If you are a recruitment agency paying public sector workers through their own limited company (PSC), you may be aware of proposed changes to legislation for temporary workers. This planned reform of the IR35 rules was announced by the government in the 2016 Budget.

What’s happening?

It is proposed that, from April 2017, public sector workers operating through their own limited company (also termed Personal Service Company or PSC), will no longer be responsible for identifying the IR35 status of their contract. This will now be the responsibility of the recruitment agency, public sector employer or other third party who is engaging with the worker. If the assignment falls within IR35, the agency who pays the PSC will also be responsible for calculating the appropriate Tax and National Insurance deductions and paying these to HMRC via their own RTI. It is also proposed that if the recruitment agency or public sector body is found to have assessed IR35 status incorrectly, and not paid any Tax or National Insurance, they will be financially liable for all of the underpaid tax and NIC including any interest and penalties. HMRC have said that they will be creating an online tool to help determine whether IR35 applies to an assignment - this is expected to be available late 2016.

Who will this affect?

Any candidate working in the public sector through their own limited company (PSC) is likely to be caught by this, including:
  • Social workers
  • Teachers & lecturers
  • Local authority workers
  • NHS workers
  • Police & armed forces
  • Other public bodies including television broadcasters BBC and Channel 4

What do you need to do?

Currently the onus is on the worker to verify that they are inside or outside of IR35. Under these changes it will be down to the recruitment agency or public sector engager to make this decision. If it is determined that a contract falls within IR35, it means the income from the assignment is deemed to be employed income for the purposes of tax and National Insurance. The agency or public body will have to deduct full PAYE tax and both Employee’s and Employer’s Nation Insurance, as they would for a worker employed directly. If it is agreed that an assignment falls outside of IR35, nothing will change, with workers being able to pay themselves a combination of salary and dividend and paying corporation tax. As the liability will now fall on the agencies and public sector bodies, if IR35 status is incorrectly determined, it looks likely that recruiters will take the safest approach and more people will be caught by IR35 than currently are. Indeed, HMRC have said that they expect most public sector PSCs to be caught by IR35. Note- if you are currently paying your temporary workers as employees of a compliant Umbrella company, such as Liquid Friday, IR35 does not apply and these changes will have no impact on your operations.

What happens next

The government’s consultation entitled, “Off-payroll working in the public sector: reform of the intermediaries legislation” ran from 26th May to 18th August. It invited views from stakeholders on the perceived impacts of the changes including opinion on a new process for determining IR35 status. Feedback is currently being analysed and the outcome will be publically available here. We fully expect a further announcement to be made in the Chancellor’s Autumn Statement on 23rd November 2016.

Don’t panic!

We fully appreciate that this will put substantial administrative pressure on our agency partners. At Liquid Friday we already have a robust in-house process for an IR35 caught limited company payroll and we intend to offer agencies a complete PSC Payroll Bureau service. By acting as your administrators, or indeed simply as your IR35 advisors, we will absolutely be able to help you lower your risk and comply with the new requirements.

Keeping you updated

Colin Gunnell, Managing Director, commented: “As full FCSA members, Liquid Friday are at the forefront of understanding regulatory change and its impact on agencies and contractors. We believe that the upcoming reforms to IR35 are likely to affect most PSCs operating within the public sector. At Liquid Friday we are in a position to help those affected, understand the changes and make sure that they can comply and meet their obligations.”

Free IR35 Consultation

As an industry-leading authority on IR35 we are offering a free consultation to all affected recruitment businesses, even if they are not currently using Liquid Friday. In addition, to help agency directors communicate these changes to their colleagues, we will be running seminars for recruitment agency employees at all levels. Places are limited so please register your interest as soon as possible, so that we can accommodate everyone. Naturally we will be closely monitoring developments and rolling out a comprehensive programme of communications to agencies over the coming months. To arrange a free consultation, or register your interest for a seminar, please email  For more information go to the IR35 Helpline website at