🏛️ Public sector

Public sector IR35 reform was introduced in April 2017, shifting responsibility for IR35 status determination from contractors to the public body engaging them. If you contract with a public authority (NHS, local council, government department, or similar), the public authority decides your IR35 status and the fee-payer deducts tax accordingly.

What changed in April 2017

Before April 2017, all contractors were responsible for assessing their own IR35 status. The 2017 reform removed this responsibility for public sector engagements. Under the reformed rules:

  • The end client (the public authority) issues a Status Determination Statement (SDS)
  • If the determination is inside IR35, the fee-payer (typically the agency) deducts Income Tax and NI via PAYE before paying the contractor's PSC
  • The contractor's PSC receives net-of-tax fees

Which organisations are public authorities?

A public authority for IR35 purposes includes:

  • Central government departments and their agencies
  • NHS trusts and foundation trusts
  • Local authorities
  • Police forces and fire services
  • Schools and universities funded by public money
  • Certain charities and housing associations (check their status)

How status is determined in the public sector

The end client must assess status using HMRC's CEST tool or their own reasonable process. They must issue an SDS to the contractor and the fee-payer. As a contractor, you can challenge the SDS if you believe it is incorrect, and the public authority must respond within 45 days.

Inside IR35 in the public sector: your options

If you are determined to be inside IR35 for a public sector engagement, you can accept the determination and operate within it, challenge it formally, or consider whether the engagement remains commercially viable given the tax treatment.

Operating through a PSC when inside IR35 (public sector)

If your engagement is inside IR35 and you operate through a PSC, your PSC receives fees with tax and NI already deducted. You can still draw a small salary from your PSC (HMRC permits this), but the practical advantage of the PSC structure largely disappears for inside-IR35 work. Many contractors in this position choose to use an umbrella company instead to avoid the double compliance burden.

Practical steps for public sector contractors

  • Request the SDS from your agency or the public authority before starting work
  • Review the SDS carefully and gather evidence to support your position
  • Keep all correspondence about the determination
  • If inside IR35, model your take-home pay and compare umbrella vs PSC
  • Consider IR35 contract insurance for high-risk engagements
Disclaimer

This guide provides general information only. IR35 is complex and the consequences of getting it wrong are significant. Always seek specialist advice from a qualified tax adviser. Find one via our accountant directory.