IR35 reforms: Why the war of words between HMRC and IT contractors needs addressing

HM Revenue & Customs (HMRC) appears to have a very different view of how the IR35 tax avoidance reforms are affecting the public sector compared to many of the IT contractors Computer Weekly regularly speaks to.

Over the course of the past 12 months or so, we’ve fielded tip-offs and reports from sources about IT contractors leaving projects and departments in their droves, after having their engagements re-classified as “inside IR35” by the public sector bodies they work for.

Receiving this classification means contractors must be taxed in the same way as permanent employees (by making PAYE and National Insurance contributions). They are not, however, entitled to receive paid holiday, sick pay or many of the other benefits salaried workers are often entitled to.

As you can see from Computer Weekly’s exhaustive reporting of the IR35 reforms, the stories all stand up. We wouldn’t publish them if they didn’t.

Assessing the IR35 evidence

Invariably, when we’ve approached HMRC for a response to these stories, they’ve sent over the same canned comment time and again, which never quite addresses the questions or claims we put to them directly.

“Public sector organisations and contractors are free to work with each other in a manner that suits their circumstances, but it’s fair that two people doing the same job should pay the same taxes. These reforms will help ensure that happens,” the statement would read.

Concluding with the phrase, “Like all tax changes, we are monitoring their effect to make sure they work effectively and fairly.”

Recently, though, the tone of the comments we’ve received from HMRC have become more dismissive, with the organisation now taken to claiming there is “no evidence” of IR35 causing contractors to leave the public sector or that it is harming the delivery of IT projects.

This is despite our reports about contractors leaving the Home Office, the UK Hydrographic Office, and even HMRC itself for IR35-related reasons.

Third-party accounts

There has also been huge amounts of feedback from organisations, such as the Association of Independent Professionals and the Self-Employed (IPSE), about people leaving the public sector since the reforms came into force in April 2017. But, for whatever reason, HMRC does not seem to recognise it.

The reasons for this are the subject to fierce debate within the IT contractor community, with some stakeholders accusing HMRC of trying to “fit the facts to suit its own agenda”, while others think the organisation is simply too far removed from the situation to get an accurate view of the day-to-day impacts these reforms are having.

And that’s just some of the more polite assertions.

These debates are now spilling into the public domain, following a row between HMRC and contributors to the IR35 Forum.

The Forum meet on a quarterly basis to discuss the how the tax avoidance legislation is affecting contractors and taxpayers, with representatives from HMRC, IPSE and other trade bodies and stakeholders all invited to share their feedback and insights.

At the moment, how HMRC has chosen to represent the discussion that took place during the group’s latest meeting on 17 July 2017 is a matter of dispute, with several contributors complaining the published minutes do not accurately reflect what was talked about.

The matter of the minutes

While a few quibbles over the minutes of a meeting might not sound all that interesting, the fact of the matter is the get-together in question is the first this group has held since reforms came into force on 6 April 2017.

For anyone wanting to assess how well (or not) the implementation of the reforms has gone during its first three months, these minutes are likely to be their first port of call.

Therefore, attendees fear anyone reading them would conclude the rollout has been a largely positive experience for all concerned, when that is not quite the case.

For example, there were anecdotal accounts shared during the meeting about contractors leaving the public sector over IR35 and the detrimental impact this is having on productivity. You wouldn’t necessarily know that, though, from reading the minutes in their current form.

What the minutes do state is that, “HMRC has seen no evidence of significant impact on attrition rates of contractors,” as a result of the IR35 reforms, but who’s to say that is true of everybody else?

With this in mind, HMRC has now offered to update the minutes from the meeting with additional feedback from those who attended, after contributors complained they were published without their approval.
It, of course, remains to be seen if the amended version will feature a wider range of viewpoints and perspectives on how IR35 is affecting the public sector, but – if not – it is fair to assume we’ll see more organisations calling HMRC out on it, if they don’t.

On the face of it

In the meantime, HMRC’s “no evidence” statement could be interpreted as an outright denial by HMRC that contractor “attrition rates” have soared since the IR35 reforms came into effect.

But no “significant impact” is not the same as stating “no impact at all”, and focusing purely on contractor churn as a measure of how the reforms have impacted on the public sector doesn’t really tell you anything.

All it says is the number of contractors entering and exiting the public sector as a whole is (more or less) balancing out. So, for every person who leaves, another person joins, but that doesn’t mean – in any respect – it’s a like-for-like replacement that’s taken place.

The term contractor is a cover-all for a huge variety of public sector positions, ranging from locum doctors and social workers to software engineers and IT project managers, and it not immediately clear if HMRC’s attrition rate calculations distinguish between them in any way.

For example, if a contractor performing an IT-related role leaves the public sector, but an agency nurse joins, there will be no change in attrition rate, right?

Measuring the attrition rate tells you nothing about how much extra money public sector organisations may have to shell out now to replace the people who have hot-footed it over to the private sector, where (for the time being, at least) the IR35 reforms are yet to rollout.

Upping rates and downsizing travel

Some public sector IT contractors, ruled to be working inside IR35, are known to have upped their daily pay rates to cover the fact they now liable to make PAYE and National Insurance contributions.

It is fair to assume the cost of the IT project they are working on could rise on the back of this, which may prompt the department overseeing it to cut the number of people working on it to balance the books. This, in turn, could have implications for when it gets delivered. But, you wouldn’t know that by looking at the attrition rate.

Computer Weekly has also heard anecdotal accounts of IT contractors who, where no increase in day rate can be agreed, are pushing back by opting out of engagements considered that require them to travel long distances.

It is hard to say exactly how prevalent this attitude is within the IT contractor community, but could cause additional headaches for IT managers already struggling to source people with skills and expertise that are in high demand.

Sit up and take notice

What all this serves to highlight is that there are many ways to measure how big an impact the IR35 reforms have had on public sector IT contractors, and how we define these impacts (positive/negative) will vary from stakeholder-to-stakeholder.

This is why it is so important to ensure as wide a range of viewpoints as possible are included and retained for posterity so whoever gets to decide whether the public sector IR35 reforms have been a success or not can factor in every take on the situation.

Should the public sector IR35 rollout be considered a success, this is likely to strengthen the case for extending the reforms to the private sector as well, potentially affecting thousands of businesses who rely on contractors there too.

Again, this is why it is important that as much evidence as possible about the impact of public sector reforms is properly recorded, and why the anecdotal accounts of those directly affected cannot afford to be ignored.