Existing contracts and the new IR35 public sector rules

Changes to the IR35 rules relating to the supply of contractors in the public sector will apply from 6 April 2017, meaning that, where IR35 applies, a recruiter will be responsible for accounting to HMRC for PAYE and NICs, including employers NICs, on payments it makes to a personal service company.

Whilst there are a number of practical difficulties to be overcome, including the setting of rate, accounting for costs and availability of contractors, the position will no doubt be simpler with new arrangements, assignments and contracts than where long term frameworks are already in place, with clients or contractors already on site. Existing client arrangements may have set rates and margins for limited company supply, obligations to fulfil assignments and limited scope for amendment or early termination, potentially leaving a recruiter with the prospect of operating at a reduced or even possibly negative margin, once employer NICs are accounted for, or having to manage a situation where a contractor may not wish to continue the assignment.

The other significant danger in any commercial agreement of this type is indemnities. Contractor tax indemnities are commonplace in hirer drafted contracts and may not have been considered as such a commercial risk if the contract was entered into prior to the new IR35 changes being known, or potentially even contemplated.

Theresa Mimnagh, Associate Director at Lawspeed said “Indemnities in a contract should always be carefully considered to ensure that a recruiter is not left in a position of being liable for actions over which it has little or no control. Prior to the new IR35 rules, the risk of liability under IR35 may have been considered to be minimal. However, under the new arrangements where recruiters will be reliant on information from a hirer and potentially liable, these indemnities, along with set rates and margins may need to be reconsidered and renegotiated. This does not mean simply redlining agreements, it’s often the case that commercial compromises can be reached which reflect and appreciate the concerns of both parties whilst also offering a degree of commercial protection that might otherwise not have existed.”

It is not just recruiters who are looking at arrangements again, hirers are themselves seeking changes, whether this be in the form of stronger liability and indemnity provisions, or seeking to dictate the manner on which a supplied contractor is engaged. 

Lawspeed can help, as well as being able to advise on the implications of the changes, we offer fixed price and bespoke contract review services designed to assist you in understanding and managing the commercial risks present in contractual arrangements. For more information contact Lawspeed on 01273 236 236.