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HMRC contractors leave over inside IR35 ruling

HMRC has begun classifying its public sector contractors as "inside IR35", prompting fears of a digital "brain drain" at the organisation

The output of HM Revenue & Customs’ (HMRC) digital teams could dramatically drop, now the organisation has begun classifying its public sector contractor engagements as inside IR35.

According to Computer Weekly sources, a large number of off-payroll workers are preparing to leave the organisation in droves over the next few days, now the organisation has set out plans to start taxing limited company contractors in the same way as permanent employees.

This means they will be liable to pay the same employment taxes as salaried workers, resulting in a sizeable drop in their take-home pay.

HMRC is understood to have begun notifying affected contractors from 20 March, with many set to leave on 31 March as a direct result.

One affected contractor, who spoke to Computer Weekly on condition of anonymity, estimates around 70% of the contractors in their department are leaving over the ruling, while others are trying to negotiate an increase in their day rates to cover the cost of the change.

HMRC has a prominent role in pushing through the IR35 anti-tax avoidance reforms, which come into force on 6 April.

As a result, the organisation has been widely anticipated, in contractor circles, to take a hard line on how off-payroll workers are classified, which is thought to have contributed to contractors ending their engagements prematurely in previous months.

Reliance on contractors

HMRC is known to heavily rely on contractors for the delivery of its various digital projects, prompting concerns about how these initiatives will proceed, in the wake of an IR35-induced brain drain occur.

“HMRC’s plans will be in chaos. I can’t see how it would be able to keep delivering even a quarter of what they had planned,” said one contractor, who recently left a long-term engagement at HMRC.

“There are still negotiations going on to try and convince key people to stay inside, so a few haven’t made their decision whether to walk on Friday or not.”

Speaking to Computer Weekly, Seb Maley, CEO of consultancy firm QDOS Contractor, said the walkouts could have a destabilising impact on the organisation’s digital output.

“HMRC have a large number of major projects that contractors will be involved with, such as making tax digital, which is under a lot of scrutiny as it is,” he said.

Read more about IR35

  • Public sector contracting stakeholders claim newly launched tool is returning inaccurate results over IR35 status of some public sector off-payroll workers.
  • Several major IT projects at a Ministry of Defence (MoD) agency are on hold after a mass walkout of IT contractors in a dispute about their tax status, Computer Weekly has learned.

In a statement to Computer Weekly, an HMRC spokesperson said users of its online services are unlikely to encounter much in the way of disruption as a result of the reforms.

“These reforms are about promoting fairness in the tax system, and we are clear everyone should pay their share. HMRC rightly holds everyone who works for it to this standard,” said the statement.

“Customers who use our online services should not be affected by these reforms.”

The exodus of contractors HMRC is experiencing is being repeated across the whole public sector, said Maley, whose organisation offers contract reviews to public sector organisations to decide how to classify the tax status of the contractors they engage with.

Indeed, the UK Hydrographic Office saw 30 or so IT contractors leave last summer, after the Ministry of Defence agency embarked on an anti-tax avoidance clampdown against off-payroll workers.

“In the larger public sector organisations we’re working with, despite the fact organisations are using our services and taking care to accurately classify contractors, they are still leaving in droves,” said Maley.

“There is a substantial loss of resource, even when the public sector body is being as reasonable as possible,” he said. “So you can imagine what it’s like in one where they’re taking a very risk-averse approach.”

HMRC backlash

During the lead up to the reforms coming into force, HMRC has found itself under fire on several fronts from public sector stakeholders, while the Association of Recruitment Consultancies has penned a letter to MPs asking them to delay the roll-out of the new-look IR35 rules.

HMRC has also been widely criticised for the late delivery of an online tool designed to help public sector organisations decide if contractor engagements should be considered inside or outside IR35.

The tool has also been slammed by users for returning results that are reportedly out of step with employment case law, as well as being error prone.

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