peshkova - Fotolia

IR35 reforms: HMRC 'delays' blamed for last-minute public sector compliance panic

Public sector stakeholders claim the late release of HMRC's online tax status assessment tool and its supporting IR35 legislation is causing contractors to leave projects in their droves

This article can also be found in the Premium Editorial Download: Computer Weekly: Virtual reality in healthcare

HM Revenue & Customs (HMRC) stands accused of sabotaging public sector efforts to comply with the IR35 anti-tax avoidance reforms by giving organisations too little time to determine the tax status of their contractors.     

While the arrival of the IR35 reforms was foreshadowed in both the 2016 Spring Budget and November’s Autumn Statement, confirmed details about how public sector organisations should implement them emerged just weeks before they were due to come into force on 6 April.

“It’s not left people with a great deal of time to finalise their plans, and there is a lot of panic and confusion going on in the market as a result,” Seb Maley, CEO of consultancy firm QDOS Contractor, told Computer Weekly.

“Back when it was the Budget [in March 2017], we were saying they should delay it or introduce a grace period or a delay the reforms until the autumn, because it’s clear that no-one is prepared.”

Maley’s organisation has had to temporarily suspend the 24-hour contract review service it usually offers organisations that need help determining the tax status of their off-payroll workers, as the 6 April deadline approaches.

“Despite the fact we have a large team working nights and weekends, we’re not able to support the faster turnarounds on contract reviews right now,” he said.

Computer Weekly sources claim the looming deadline has left public sector bodies scrambling, forcing them to make blanket judgements on the IR35 status of contractors, prompting many to vote with their feet and cease working in the public sector altogether.

Read more about HMRC

  • HMRC has begun classifying its public sector contractors as “inside IR35”, prompting fears of a digital “brain drain” at the organisation.
  • Lords committee echoes previous criticism by MPs over timetable for Making Tax Digital programme and calls for further trials.

“A lot of public sector organisations have lost a huge number of contractors. We know that is happening and still happening now,” said Maley.

“In the case of IT contractors, their skills are transferrable and they are not limited to working in the public sector, and while the old-fashioned IR35 rules still apply in the private sector, a lot of them have taken the decision to switch from public to the private sector early,” said Maley.

Indeed, the UK Hydrographic Office lost around 30 IT contractors last summer, after deciding independent contract reviews were no longer sufficient proof its off-payroll workers  are paying the correct tax, under the IR35 rules.

HMRC is also known to have lost a number of IT contractors since the organisation began notifying its off-payroll staff, from Monday 20 March, their engagements qualified a number of them to pay the same tax as permanent employees.

Transport for London (TfL) moved to implement a ban on all limited company contractors working for the organisation, to pre-empt the reforms, in January 2017.

According to a report on Contractor UK, the company told its existing off-payroll workers to either start paying PAYE tax and National Insurance Contributions or leave, but TfL is now thought to have u-turned on these proposals following a backlash amongst its staff.

Late-running legislation 

The final version of the Finance Bill, which sets out how public sector organisations should assess the tax status of contractors, arrived just weeks before 6 April on Monday 20 March.

“The final IR35 legislation states public sector bodies have a duty to take reasonable care over making these [tax status] determinations, but this is not what we’re seeing in practice,” Julia Kermode, CEO of The Freelancer & Contractor Services Association (FCSA) told Computer Weekly.

“Although what these public sector bodies are doing is not right, I don’t know what else they can do at this juncture because they have to give everyone a determination before next week 6 April.”

Similarly, an online tool produced by HMRC, designed to help public sector organisations ascertain if the contractors they engage with should be taxed in the same way as salaried workers or off-payroll staff, only arrived on 2 March 2017.

The Employment Status Service (ESS) has been roundly criticised for turning out results that go against established employment case law, and for making inaccurate declarations about the tax status of some contractors.

Computer Weekly understands the tool has since undergone further tweaks since launch, which is another reason why Maley is convinced HMRC should have delayed the reforms until all the required pieces were in place.

“For it to be launched and for it to still be tweaked and adjusted is just not helpful, and unfortunately it is all down to HMRC. They should have delayed the reforms, but it’s just too late now,” he said.

Organisations yet to make a decision

According to various civil service stakeholders and contractors Computer Weekly has spoken to in the lead up to 6 April, many public sector organisations were awaiting the release of these items before deciding how to act on IR35.

“HMRC started looking at IR35 a year ago, if not longer, and we first saw a draft tool the day after the Autumn Statement in November, and then they issued the final tool two to three weeks ago,” said Kermode.

“HMRC have had a long time to develop things, but the external world doesn’t seem to have had much time at all to prepare.”

In a statement to Computer Weekly, an HMRC spokesperson defended the tool, and the timing of its release.

“We always said that the new online tool would be ready for April when the new legislation takes effect. We have worked extensively with stakeholders to develop the tool, including on a beta version available since early February,” said the spokesperson.

“The Employment Status Service has been extensively tested with the largest public bodies and stakeholders affected by the changes. While we will not oblige contractors to use the tool HMRC will stand by its results where correct information has been inputted in line with the guidance.”

Reforming public sector contracting

The IR35 reforms are part of a push by HMRC to clampdown on limited company contractors who, essentially, perform the same job as permanent, salaried employees but are exempt from PAYE tax on their earnings.

Up to now, the onus has been on contractors to self-determine how they should be taxed, but that is set to change from 6 April, when public sector bodies will assume responsibility for deciding whether these individuals should continue to be classified as off-payroll workers (outside IR35) or not (inside IR35).

For instance, someone deemed working inside IR35 who earns around £50,000 a year would pay out £13,000 in employment taxes, while a “non-compliant” limited company contractor, who essentially working as a permanent employee in all but name, could end up paying as little as £2,000 in tax.

To be considered non-compliant a limited company contractor effectively requires the off-payroll worker to behave in the same way and enjoy the same working conditions as a permanent employee.

To guard against this occurring, contractors are often advised to take protective action that firmly marks them out as a freelancer working within a public sector organisation, rather than a salaried worker.

These vary in complexity, from contractors informing the organisation they work of their intent to take annual leave (rather than request it), to having a substitution clause included in their engagement that gives them the right to send someone else in to perform their job at any point of their engagement.

“The majority of contractors, particularly in the white-collar space, talking about IT specifically, are outside IR35. They are genuinely working outside and they should be allowed to continue doing that,” said QDOS contractor’s Maley.

Creative accounting

It is difficult to say with any degree of certainty how many of the thousands of contractors who work within the public sector are pre-meditated tax avoiders, but HMRC estimates the activities of non-compliant contractors cost the Exchequer £440m during the 2016/17 tax year.

Additionally, as outlined in the Treasury’s 2017 Spring Budget Policy Paper, the reforms are expected to generate around £185m in additional tax during the 2017/18.

The accuracy of those predictions remains to be seen, though, given the government confirmed in the Spring 2016 Budget Policy Costing document it had no clear idea how many people would be affected by the reforms.

“The uncertainty around data makes it difficult to identify the affected population,” said the document.

The amount of time, resources and productivity many public sector organisations have lost as a result of getting to grips with the reforms may cancel out any expected financial benefits.

“If you think about the cumulative man hours that have been spent throughout the public sector by organisations who have created teams just to concentrate on just this for months, and you think how much that has cost so far, it must be absolutely significant,” said Maley.

Retrospective investigation risk

For contractors whose public sector engagements were previously accepted as being outside IR35, there is a concern they could find themselves on the receiving end of a retrospective investigation by HMRC is they are later reclassified as working inside IR35.

This, in turn, could result in them receiving a backdated request for unpaid tax, and is regularly cited by public sector stakeholders as a reason why some contractors have prematurely ended their engagements.

“It’s a logical concern, but I think – in reality – the likelihood of HMRC expending a huge amount of resource by going back and doing that is unlikely, because the whole purpose of this legislative change was to make their lives easier, because they don’t have the time or resources to police IR35 as it is now,” said Maley.

“They would need to carry out an investigation into every individual limited company, and an inquiry can take 18 months or more to conclude.” 

Read more on IT for government and public sector

Data Center
Data Management