IR35 for Contractors in the Public Sector

A man in front of a projection of some computer coding, pointing out what he's teaching

In 2017, reform to IR35 in the public sector was introduced – a move which affected all contractors operating through their own limited companies engaged by public bodies.

If you’re a contractor working in or thinking of operating in the public sector, read this simple guide to gain a firm understanding of IR35 changes and to find out if working through an umbrella company could be the best solution to the reform.

What is IR35?

IR35 is anti-tax avoidance legislation introduced in 2000, to prevent people from making significant tax savings by disguising their employment status.

This describes instances in which someone would perform their duties through their own limited company though their role is similar to that of a traditional employee. They would then enjoy the tax benefits associated with working through a limited company.

If a working arrangement reflects employment (inside IR35), the worker is taxed as an employee. However, unlike a contract of employment, a contractor operating inside IR35 via their limited company will not receive statutory employment rights, such as paid sick leave, maternity or paternity or holiday pay.

In contrast, if the contractor provides their services as a genuinely self-employed worker, they belong outside IR35 and will not be taxed as if they were an employee.

For more information, please read our in-depth guide to IR35.

What is the public sector?

The public sector comprises of organisations owned and controlled by the government. Revenue earned by public sector organisations – or ‘bodies’ as they are often known – is invested back into running the country.

Examples of public sector bodies include;

The NHS
Government departments (e.g. Home Office, Defra)
State schools and universities
Military
Police force

What are the changes to IR35 in the public sector?

Changes to IR35 in the public sector saw the responsibility for determining IR35 status shift from the contractor, to the end client.

As part of the reform, the ‘fee-paying party’ (either the end client or the recruitment agency) became liable for IR35, assuming all legal obligations have been met throughout the supply chain.

It means contractors are no longer in charge of determining their tax status, with public sector organisations tasked with this.

When did the changes to IR35 in the public sector come into force?

After years of speculation, the UK Government introduced IR35 reform in the public sector on 6th April 2017.

What has been the impact of IR35 changes in the public sector?

In light of reform – and for fear of falling foul of the legislation – several well-known public sector organisations decided to only engage contractors inside IR35.

Given operating on an inside IR35 project means your income for that assignment is taxed under the PAYE system, many contractors were taking home less in the public sector as a direct result of the reform.

Does IR35 only affect the public sector?

No, reform was also rolled out in the private sector on 6th April 2021, after a 12-month delay brought about by the COVID-19 pandemic.

The changes mirror those enforced in the public sector but only apply to medium and large businesses. The notable difference is that small businesses are exempt from the changes.

Is an umbrella company the best solution for me?

If your public sector contract is deemed inside IR35, your earnings for that assignment are considered the same as a full-time employee. You would have to make the same National Insurance and PAYE tax deductions as an employee. As such, working through an umbrella company – which offers the flexibility of self-employment but with the employment rights that come with employment – may be the best solution.

So there you have it – a whistlestop guide to IR35 changes in the public sector.

To recap, contractors’ end clients are now tasked with assessing IR35 status, which means operating via an umbrella company has become an increasingly attractive option.

For more information and to speak with one of our umbrella company experts, get in touch.