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Off-payroll working (IR35) in the public sector

Given the numerous ways in which working engagements using a personal service company (PSC) within the public sector can be carried out, the rules about tax and NICs for off payroll working – also referred to as IR35 – and further changes to those rules from April 2020, should be understood by anyone working in or with that sector.

For UK tax and NIC purposes, an individual taking on work may be engaged as either an employee or as a self-employed contractor. Note that, in employment law, there is a third status, that of ‘worker’, but this is irrelevant for tax and NIC.

For tax and NIC, the work may involve a contract directly between the engager and the worker, or it can involve an intermediary. Some self-employed people find work through agencies, and if they commit to personal service via the agency contract, the agency should normally treat them as deemed employees for tax and NIC purposes and tax them under PAYE.

For a variety of reasons, for example to limit personal liability, many contractors avoid self-employment and will be engaged instead through a personal service company (PSC), which might contract directly with clients but might also find work for its shareholder-director via agencies. Irrespective of whether the worker uses a PSC, if the work looks more like disguised employment than self-employment then that will dictate how any payment under the contract will be taxed. HMRC now refers to these arrangements as ‘off-payroll working’ (OPW). Many refer to the tax treatment of workers affected by the OPW rules as simply IR35.

The OPW rules were changed for public sector contracts in 2017, but they are scheduled to change further from 6 April 2020, along with many private sector contracts. The onus of compliance in these cases lies, or will lie for non-small private sector engagers, with the client or the agency making the arrangements and payments.

It is important to remember that the underlying rules for determining whether a worker is employed or self-employed are not changing. This distinction remains fundamental to the question of whether IR35 or OPW rules should apply, as it is still aimed at combatting ‘disguised employment’.

Public sector rules in overview

New public sector rules have applied to payments made after 5 April 2017 regardless of the date of the contract for the work or the time when the work was carried out.

Where work is undertaken for a public authority, the public authority, rather than a worker's PSC, is responsible for determining the tax status of the contract, ie whether it is disguised employment or a PSC providing services.

If the contract looks more like disguised employment, the engager must ensure that any payments made to the PSC under that contract are subject to PAYE with the worker named as a deemed employee. Many public authorities have gone a step further and actually made such workers proper employees with full employment rights.

The term public authority includes government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service.

New rules from 6 April 2020

New rules are currently being finalised for implementation from 6 April 2020, which will apply to work engagements in the public sector and also to large and medium-sized engagers in the private sector. The engager will become responsible for determining the tax status of the contract, so does it look more like disguised employment or a PSC providing services? If it is disguised employment, any payments made to the worker under the contract must be made under deduction of PAYE and National insurance.

The key changes to note for public sector contracts extending beyond 5 April 2020 are a new requirement for a Status Determination Statement and a new disagreement process.

Status Determination Statement

Public sector engagers (and large/medium entities in the private sector) must review all contracts for work and decide whether it implies employment or self-employment tax status for the worker concerned. The engager must then issue a Status Determination Statement (SDS) accordingly. 

The SDS is a new and important practical document informing all entities in the labour supply chain whether or not payments for the work will need to be made under deduction of PAYE and national insurance. Many businesses will use the HMRC Check Employment Status for Tax (CEST) tool to make the determination.

The SDS must also include the reasons for the decision. The engager must take reasonable care when making the determination, otherwise the obligation to issue an SDS isn't met.

Disagreement with the Status Determination Statement

Either the fee-payer or the worker can challenge a status determination with the client. It will therefore be necessary for the client to have a process in place to handle such disagreements. There is no time limit for making such challenges.

Discussions about disagreements over a status determination will be led by the client who made the SDS. There is no appeal to HMRC.

The challenger should give reasons and provide evidence to support these reasons.

The client must then consider any further information provided, reconsider the status determination and decide whether to maintain the original determination and if so to give reasons, or otherwise to withdraw it. They must respond to the fee-payer and/or worker within 45 days of receiving the disagreement.


Where work is undertaken for a small private sector engager, the existing private sector rules (IR35) continue unchanged. The worker remains responsible for determining the tax status of the contract and ensuring that their PSC applies the IR35 rules if the work is deemed employment. The rules for small engagers and those working for them are not changing.

Further details and advice are available in the following TAXguides and webinars which are available for free download to members of the ICAEW Tax Faculty. Membership of ICAEW is not required to join the Tax Faculty.