IT contractors working in government are under pressure like never before over their tax status, and many people in Whitehall IT fear that a clampdown on the use of temporary staff could lead to a damaging exodus of vital digital skills.
HM Revenue & Customs (HMRC) is closely scrutinising government departments’ use of contractors and in particular whether contractors are eligible to be taxed under controversial rules known as IR35. Freelancers using IR35 are treated as off-payroll, and are typically employed by a limited company of which they are a director – and as such, avoid PAYE tax on their contracted earnings.
HMRC wants to clamp down on contractors abusing the system by making public sector bodies treat them as salaried workers unless they can prove they conform to IR35 rules. Furthermore, forthcoming IR35 tax avoidance reforms will see public sector organisations assume responsibility for determining how limited company contractors should be taxed. It will be up to the public body to decide if the contractor has to pay tax through PAYE at source, rather than through their own personal companies.
At present, the onus is on contractors to declare themselves “outside” of IR35, to avoid being taxed in the same way as a permanent employee, and to conduct their business in a way that does not risk them being considered one.
For digital leaders in government, the need to prove contractors’ eligibility for IR35 is an additional level of paperwork and bureaucracy they could do without. For contractors, it’s a hassle that could cause many to leave the public sector entirely.
To give an example of what’s involved, Computer Weekly has seen a form being used by several departments to help determine the status of contractors. The paperwork runs to seven pages, and includes 38 questions that have to be answered by both the contractor and the civil servant employing them. Bear in mind there are hundreds of contractors in big departments – and this form would have to be filled out by and for every one of them.
The questions try to define the working relationship between the organisation and the contractors to see if they have – in HMRC’s terms – the same tax status as a direct employee. Here are examples of a handful of the questions:
- Are there in-house employees doing the same or very similar work or tasks as the worker?
- Does the worker work as part of a team while delivering the engagement? Please give details regarding ratio of civil servants to contractors
- Are you, the worker, obliged to provide a substitute if you cannot attend for whatever reason? If you are not obliged to provide a substitute, can you provide a substitute during this particular engagement?
- Could circumstances arise where the worker would provide a standard professional weekday’s work, without this being charged to the department? If yes, please provide details of all instances of this.
- Is the department obliged to provide the worker with continuous work throughout the period of engagement? For instance in circumstances where project milestones are amended
- Can the worker refuse work offered to them by the department during the engagement?
- Is the work subject to monitoring / evaluation, such as internal quality review, peer review, gateway review etc? Please provide as much detail as possible.
- Does the department have the right to direct the worker about working methods or when the work is done? If so, to what degree – please give detail.
- Does the worker follow a pre-determined business or programme plan in achieving work deliverables?
- Does the department restrict the worker from doing work for other customers or clients during the course of the engagement?
- How long has the worker worked for the department and how many times has the worker had his/her contract extended while working for the department? Please ensure that each extension is listed to give a complete record of your engagement with the department
Even from that small selection, the tone and intent of the questions are clear – to define, as closely as possible, if the job being conducted by the contractor is equivalent to that being done by a full-time employee.
Most IT contractors told they will be taxed like employees will simply walk away, leaving potentially huge gaps in capability at a critical time for the progress of digital government transformation. This was demonstrated earlier this month at the UK Hydrographic Office, an agency of the Ministry of Defence, where a dispute over IR35 led to a mass walkout – 30 of 32 freelancers left, causing major problems for ongoing IT work.
Meanwhile, the Department for Work and Pensions (DWP) has released over 300 IT contractors at short notice amid rumours (which the department denies) of a massive overspend in its DWP Digital team.
Pros and cons of contractors
Many civil servants resent the spending on contractors, who receive on average £600 per day, while staffers carry on through tiny austerity pay rises on already below-par wages. Interim staff sourced through big IT consultancies can cost as much as £2000 per day.
But government executives like contractors because they can be brought in and let go at short notice, with no need for employment costs such as national insurance and pensions. In digital government, the difficulty of recruiting scarce technology skills – with private sector employers sometimes offering two or three times the civil service salary for permanent IT jobs – means a huge reliance on short-term or interim workers.
Since the creation of the Government Digital Service, there has been a welcome move to bring technology skills back in-house – rather than relying on outsourcers. The number of digital and IT staff in the civil service has grown significantly – but still not by enough to fill every requirement, hence the importance of supplementing them with contractors.
A National Audit Office (NAO) report earlier this year into use of consultants and temporary staff in government showed that IT and project management staff account for 54% of the annual spend on freelancers. IT skills take up 11% of external resources brought in, but 25% of the money spent – a recognition of the high cost of hard-to-find technology and digital skills.
Acknowledging the reasons and the challenges behind this trend, the NAO said: “Two-thirds of the largest government projects are related to transformation IT and service delivery programmes… [But] significant skills shortages remain in the areas needed to transform government, including project management and IT, which are common specialisms of consultants and temporary staff”.
The ultimate irony of the crackdown on contractors’ tax status, of course, is that if they desert the public sector, IT chiefs will be forced to turn again to the big outsourcers and consultancies – many of which are adept at exploiting local accounting regulations to minimise their tax payments in the UK.
But for the progress of digital government at such a critical time, the prospect of losing many of the contractors upon which they currently rely is a serious concern.