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Missing Links in Future Contract Chains?

To avoid employment issues, recruiters have traditionally preferred to engage consultants for fixed-term UK contracts through an incorporated entity. The two most commonly-used entities are ‘umbrella’ and ‘PSC’ (Personal Service Company).

For more than 16 years, the issue of ‘IR35’ has been a constant thorn for government when dealing with the PSC. HMRC feels it has been facing ongoing abuse of IR35 rules by contractors coupled with a ‘head in the sand’ stance by recruiters and their clients.

In simple terms, IR35 rules apply where an individual offers services through a company to a third party; but in substance (based on a number of cases tested in court), those services are more akin to being carried out by an employee of that third party.

Last year, the government set out its intention to bring a broader interpretation of IR35 rules as they apply to a PSC operating in the Public Sector. Critically, the responsibility will move away from the PSC to the Public Sector employer or the recruiter or another third party - whichever is the closest party to the PSC. This means the employer or recruiter or third party will have to account for income tax and NIC (National Insurance Contributions) using Real Time Information (RTI) whenever a payment is made to the contractor. HMRC intends, “in partnership with the relevant stakeholders”, introducing clear objective tests for each Public Sector engagement. Where the outcome remains unclear, HMRC is developing a digital tool for engagers to facilitate a real-time HMRC view on whether the rules will apply for that engagement.

From April 2017, “Employment Agencies” which provide contractors to the Public Sector are exposed if their placements’ services are delivered through PSC’s or umbrellas. Draft clauses to bring about these changes are to be published in the 2017 Finance Bill. The government issued details in a consultation document before the summer of 2016 which gave the recruitment industry an opportunity to present its views.

In summary, it has been obvious for many years that IR35 rules are ineffective. A seemingly ongoing negative approach by the recruitment industry cannot have helped. The impending changes are probably driven by the government’s total frustration with all the key stakeholders – namely contractors, recruiters, clients, accountants and lawyers. Nobody comes out of this cleanly. The changes will most likely create even more administration for the Public Sector, recruiters and third parties.

Given the history of IR35, the successful introduction of fresh, clear and practical tests for public sector employers and their recruiters is likely to be very challenging.

Many agree the government is using this process to eventually force similar changes in the private sector. Such changes could ultimately trigger the demise of PSC’s and even umbrellas as operating vehicles for contractors. It could be argued the government’s ultimate intention is for all contractors to be employed by end users!

ItsInternational – TEAM Service Provider - is seeing similar rule tightening and re-interpretation by overseas’ authorities seeking to shore up diminishing tax takes. Thanks for letting us share with you our observations on the UK contractor scene.

As a reliable and risk-averse provider of fully-compliant ‘solutions’ for TEAM Members’ contractor and interim placements across Europe and in other key countries, ItsInternational works closely with locally-regulated service providers and locally-registered employers-of-record to ensure your valuable placements are structured to operate your assignments within the laws of their countries of work. This is transparently driven by our local network in unison with local tax offices.

As a TEAM Member, if you are either placing or aspiring to place consultants or interims abroad on fixed-term assignments, you can benefit from accessing the TEAM INTERNATIONAL HELPLINE – a free service provided by ItsInternational’s Central London offices exclusively for you.

Either call 0044 (0)20 7477 2660 for your complimentary consultation or email us at

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