HMRC have launched a consultation aimed at extending IR35. 'Off-payroll working in the public sector: reform of the intermediaries legislation' follows the announcement of the proposed changes in Budget 2016.

The government's aim is to ensure that workers supplying similar services to public sector services as direct employees and who are engaged via their personal service companies (PSC) pay the same amount of tax as if they have been directly engaged as employees. 

Hundreds thousands of PSCs will be affected.

Current rules

If a worker works for a client through an intermediary such PSC it is the responsibility of the PSC to:

  • Determine whether or not IR35 rules apply to each contract.
  • Calculate the deemed payment in excess of actual salary paid to the worker.
  • Calculate the NIC and PAYE due on the deemed payment.
  • Pay over the NIC and PAYE due to HMRC.

Proposed new rules

  • Where the end client is a public sector organisation, these responsibilities shift from the PSC to the end client.
  • Where the engagement with the public sector organisation is made through a third party such as an employment agency, these responsibilities will lie with that third party.
  • There is no change for private sector clients.

Public sector organisations

The government will use the definition of public sector set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002, which includes:

  • Government departments
  • NHS
  • Police and fire authorities
  • Local authorities
  • Educational establishments including universities
  • BBC and Channel 4

Deciding whether the rules apply

HMRC want to minimise the burden on the end users or third party agencies by simplifying the employment status rules and introducing a new digital tool for them to use.

A public sector organisation will only have to consider the employment status of a worker if:

  • The worker is not hired through an agency, and
  • Less than 20% of the value of the contract is for consumable materials, and
  • The worker owns their own company.

There is a similar series of questions for an employment agency.

When considering the employment status, the organisation must ask two questions:

  • Is the worker required to do the work themselves?
  • Does the organisation decide or have the right to decide how the work should be done?

If the answer to both questions is “yes” the worker is within the IR35 rules. 

If not, the organisation will have to refer to the digital tool.

Digital tool

  • The new tool will be based on the existing Employment Status Indicator.
  • It will be tailored to the specific needs of the organisation or employment agency user.
  • The result will be binding on HMRC if accurate information is entered.


The consultation, Off-payroll working in the public sector: reform of the intermediaries legislation, opened on 26 May 2016 and closed on 18 August 2016.  It is expected that the subsequent draft legislation will be subject to consultation and apply from April 2017.