HMRC's business tests at heart of new rules for contractors

After leaks, speculation and rumours, the Cabinet Office has now confirmed the arrangements that individual Government Departments will have to make when contracting with freelancers or renewing existing contract arrangements.

And, as widely expected, the controversial business entity tests will be a focal point as contractors have to prove their case to operate 'off payroll'.

The Government felt under pressure to clean up its act after a series of high-profile embarrassing cases which showed that some senior public workers, including head of Student Loans Company Ed Lester, operated through their own limited companies as an alleged means of reducing their tax and NICs liabilities. A subsequent review of Government Departments showed that this arrangement was not uncommon among senior appointees.

The review concluded that:

• the most senior Government staff must be on the payroll, unless there are exceptional temporary circumstances;
  
• Departments must be able to seek formal assurance from contractors with off payroll arrangements lasting more than six months and costing over £220 per day that income tax and national insurance obligations are being met. Departments should terminate the contract if that assurance is not provided. Departments also have the option of extending this requirement to other contractors as they believe appropriate.
  
• implementation will be monitored carefully with financial sanctions for Departments that do not comply.

As a result, the Government promised to put its own house in order and has now published an action note for Departments to implement when they are contracting with freelancers. (See: Procurement Policy Note – Tax Arrangements of Public Appointees (pdf, 179kb)).

IR35

The action note from the Cabinet Office explains that when someone is working for a Government Department through their own limited company, the requirement is on the contractor to consider the IR35 implications and provide evidence of one of the following:

• a) The contractor should be able to show that their company is low risk for an IR35 enquiry according to HMRC's business entity tests. This evidence will need to be shown at the six month point.
  
• b) If the contractor is medium or high risk according to the business entity tests but feels that they are outside IR35, then they will need to provide assurance in a different way. The action note gives 'a contract review by HMRC's independent IR35 helpline' as the example of how to do this. Again this will need to be provided at the six month point.
  
• c) If the contract is within the scope of IR35, the worker must provide evidence that they are operating the IR35 legislation on the payments received from the Department. (As the IR35 payment is made at the end of the tax year they will have to commit to meeting this requirement at an agreed later date).

Government Departments will have to provide evidence that they are meeting their obligations under these rules and will be subject to sanctions if they fail.