The Government implemented new ‘off payroll’ measures to enforce IR35 within the public sector from April 2017 onwards. Rather than being a revenue-generating success for HMRC, the implementation of the new rules has been a disaster. Together with expert opinion, we look at what damage has been done as a result of the reforms.
What are the Public Sector IR35 reforms?
The Intermediaries Legislation (IR35) was created to ensure that individuals working via their own limited companies, but deemed to be ‘disguised employees’, are subject to standard income tax and National Insurance Contributions on their earnings.
Since the implementation of IR35 in 2000, contractors working via their own limited companies have been responsible for determining their own employment status. However, in recent years, the Government has stated its belief that non-compliance with the legislation has become widespread.
The public sector reforms, implemented in April 2017, have made ‘fee payers’ responsible for operating the legislation – determining whether IR35 should apply to each contract, and then calculating and collecting taxes from those caught. HMRC hastily released the ESS IR35 testing tool (now known as CEST) shortly before the new rules went live to help clients determine the status of workers.
To add to the confusion, end-clients are also required to provide a conclusion as to whether or not IR35 should apply to each assignment, and take ‘reasonable care’ in doing so. However, if a public sector body (PSB) concludes that a contract falls outside IR35 – but it is subsequently deemed to be inside IR35 – then the PSB is liable for this decision, having failed to take reasonable care (according to the legislation).
Clearly, clients are risk averse and more likely to determine all of their contractors as ‘inside IR35’, unless they can confidently determine employment status accurately. IR35 was already confusing. The new rules have added another layer of complication, and the CEST tool has had overwhelmingly poor reviews over its accuracy.
The fallout – what damage has been done?
Here are some recent examples – from just the last few weeks – of how the reforms are directly impacting front-line public services (particularly the NHS), as well as professional contractors who work in the sector.
Unions threaten legal action over NHS blanket IR35 rules – CIPD [17th October]
“Two unions are bringing a case on behalf of locum doctors and healthcare workers, arguing they have been unfairly treated by the NHS’s blanket application of the IR35 rules. ”
TfL report confirms major delays are a direct result of IR35 changes – IPSE [19th October]
“Severe delays to the renewal of London Underground rolling stock were a direct result of the changes to IR35 in the public sector, TfL have confirmed.”
Tube repair work delayed due to exodus of Transport for London agency workers after tax changes – City AM [16th October]
“Transport for London (TfL) has admitted that “a significant number” of vital employees left TfL as a result of IR35 changes, revised tax legislation affecting public sector contractors.”
Public sector bearing brunt of new tax rules – APSCo [5th October]
“A robust 78% of respondents agreed that the extension of the IR35 Off Payroll rules to the private sector will impact the ability of the UK economy to source flexible labour.”
Eight ‘outside IR35’ assessments not enough to secure NHS consultant outside contract – ContractorCalculator [25th October]
The NHS has refused to hire a locum doctor outside of IR35, despite the consultant having completed eight individual assessments all demonstrating that her contract wasn’t caught by the legislation.
Locum pay up 6.3 per cent since tax dispute – The Times [23rd October]
“Doctors’ leaders are threatening to take hospitals to court, claiming that they are bringing too many locums within rules that treat them as permanent employees and force them to pay more tax.”
HMRC accused of suppressing IR35 stakeholder views on public sector contractor walkouts – Computer Weekly [5th October]
“HM Revenue & Customs (HMRC) stands accused of trying to suppress the opinions of third-party stakeholders about the impact the IR35 reforms are having on IT contractor attrition rates.”
Why have the public sector reforms failed?
Seb Maley, MD of Qdos Contractor gave us 5 key reasons why the April 2017 changes have failed.
Lack of guidance
“The guidance issued by HMRC failed to sufficiently cover the practical application of the new rules, i.e. what public sector bodies would actually have to do. They were very much left to interpret the requirements themselves which, naturally, led to a huge amount of inconsistency across the public sector as a whole. There was also vital information missing, such as how consultancies and outsourced managed service providers should be assessed and treated.”
“HMRC’s repeated assertions that 9 in 10 workers were wrongly classing themselves as outside IR35 has no foundation whatsoever. However, risk averse public sector bodies unsurprisingly took heed of this misrepresentation and, initially at least, there was a common view that PSCs were merely vehicles for tax avoidance.”
Political and press pressure
“Coupled with HMRC’s own view of the world, there was also the pressure generated from numerous historical ‘exposés’ in the mainstream media. These will have dated back to the Ed Lester/Student Loans Company case, but often they were full of factual errors and misinterpretations. Again it created a very dim view of contractors and their perceived tax breaks, which led in some cases to resentment amongst permanent public servants. Public sector bodies were clearly terrified of being at the centre of the next scandal and this drove a number of kneejerk reactions.”
[Read our recent article on this very point – ‘fake news’ and contractor taxation.]
“The implementation of the tool would be comical were it not for the detrimental and very real impact it had. HMRC used the tool almost as the figurehead for the overall reform; as an answer to all the problems public sector bodies would face. Despite starting its development in the summer of 2016, the public version was not released until a couple of weeks before the legislation hit in April.”
“It has been widely – and correctly – reported that the tool has little foundation in case law. HMRC were very open about the fact that they were using historic cases to build the tool, but its logic and questions were significantly changed a number of times in the run up to the 6th April. Rather than the tool being based on a solid legal foundation, it appeared HMRC were very much reacting to the results it was generating and tweaking it to achieve the metrics they were looking for.”
Resources and knowledge
“Public sector organisations simply didn’t have the expertise or resources needed to fulfil the requirements of the reform. Having never had to deal with tax status in any detail before, many were at a loss as to what to do. This was compounded by the fact that contractors started jumping ship, leaving numerous critical projects in genuine danger of failure.”
IR35 reforms “should be suspended without delay”
Dave Chaplin, CEO of ContractorCalculator, who has covered IR35 since its inception, told us that the reforms should be suspended without delay, to prevent further damage to essential public services.
“HMRC are entirely responsible for the chaos that has ensued. They naively took on the impossible task of building an assessment tool in a few months that would give a certain result for IR35 status, ran out of development time, and released something not fit-for-purpose which omits key areas of case law.”
“They have since perpetrated the myth that their tool is legally binding and the only way assessments should be conducted by public bodies, including the NHS.”
“We are now seeing freelance locums leave the NHS and move to the private sector as a result of the tool giving the wrong results. This is now significantly affecting patient care.”
“The responsibility for the entire mess lays at the door of HMRC, and the reforms need to be suspended immediately to ensure the NHS is not further damaged.”