The IR35 public sector rules
The contractor tax known as IR35 (named after an Inland Revenue publication) has existed since April 2000 – see Sch.12 Finance Act 2000. These were supplemented in April 2017 by the creation of new rules relevant to contractor engagement by public authorities – see Chapter 10 Part 2 ITEPA 2003.
Where a qualifying contractor (normally a PSC) provides services to a public authority and there is a deemed employment relationship (as described under ‘the original IR35 rules’ above), the public authority hirer is liable to pay PAYE and NICs as if the PSC (not the individual) were an employee of the authority. If a business (normally an employment business) is involved in supplying the PSC and paying the contractor (referred to in the legislation as ‘the Fee Payer’), that business is obliged to pay the PAYE and NICs as if it were the employer of the PSC.
So under these rules IR35 tax liability shifted. The party responsible for the assessment of deemed employment status under the IR35 rules switched to the hirer and the Fee Payer, with the hirer responsible for informing the Fee Payer of its conclusion.
Under the 2017 rules where there is a deemed employment relationship the liable party (Fee Payer or hirer) is required to account for PAYE and NICs on 100% of the contractor invoice (net of VAT) for services provided, employer NICs being due from the liable party (i.e. cannot be deducted from the payment to the contractor company).
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