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An NHS watchdog has admitted to mistakes in its interpretation of how the IR35 status of off-payroll workers should be assessed, giving rise to concern that some contractor engagements may have been incorrectly classified.
NHS Improvement, which oversees the work of various NHS trusts and care providers, made the admission in a guidance document, in which it confirmed inaccuracies in its initial interpretation of the IR35 assessment procedures.
The new-look IR35 regulations came into force on 6 April, and – for the first time – saw responsibility for deciding how off-payroll public sector workers should be taxed pass to their contracting organisations.
Previously, it was up to contractors to self-declare if their public sector engagements meant they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll staff (outside IR35).
According to the NHS Improvement guidance, the organisation previously held the view that many of the contractors supplying services to the health service before 6 April should be considered inside IR35.
“We anticipated that providers would need to ensure that all locum agency and bank staff were subject to PAYE and on-payroll for the new financial year. This was not accurate,” the guidance document said.
The organisation now concedes that the blanket approach to classification is incorrect, and each engagement should have been assessed in a “fact-specific way” and on a “case-by-case basis”.
Fair and accurate
Accordingly, it is urging NHS providers to revise their approach to IR35 classifications to ensure they are conducted in fair and accurate way.
“NHS providers, and all others categorised as public authorities, will need to consider whether or not an individual in their particular situation is self-employed when they determine the application of the IR35 rules in that case,” the guidance said.
“This consideration must be conducted fairly, accurately and take into account all relevant factors, including representations which may be provided by the individual.”
Computer Weekly understands that although the official line from HM Revenue & Customs (HMRC) is that all public sector organisations should be taking a case-by-case approach to IR35 status declarations, in the rush to meet the 6 April deadline, not all have done so.
Indeed, the UK Hydrographic Office reportedly adopted a blanket approach to IR35 classifications in the summer of 2016, months before the IR35 reforms came into play, prompting a mass walkout of IT contractors.
Motivation for change
It is currently unclear what prompted NHS Improvement to issue its revised guidance on IR35. However, in the lead-up to 6 April, concerns were raised by the General Medical Council about the patient safety implications of off-payroll locums and nurses leaving the health service over the IR35 changes.
Dave Chaplin, CEO and founder of advisory firm ContractorCalculator, said the NHS’s U-turn on the matter could indicate that its blanket stance on IR35 has created a brain drain.
“Many public sector firms have discovered that blanket rules have had a huge negative impact, and highly skilled contractors have been either leaving the public sector in droves, or have cost the public sector more to keep contractors and locums on,” said Chaplin.
“The IR35 reforms have been tantamount to a massive extra tax on the NHS and have led to utter chaos.”
The NHS Improvement document concludes by acknowledging the additional administrative burden that taking a case-by-case approach to IR35 classifications is likely to have on NHS organisations, but said it expects all to comply because of the cost implications.
Read more about IR35
- Research by tax advisers Qdos Contractor suggests few public sector off-payroll workers would be willing to stick around if made to pay the same tax as salaried staff.
- IT project delays predicted at Home Office following reports of last-minute departmental U-turn over contractors’ IR35 status classifications.
“Failure to comply with the updated legislation in relation to IR35, and correctly assess the worker contract and/or notify the third-party agency of determination, could result in providers being liable to pay the equivalent PAYE deductions to HMRC,” the document said.
“In addition, inaccurate assessments of individual circumstances could lead to unnecessary cost, time and expense, and this should be avoided.”
The fact that an organisation the size of the NHS has seen fit to revise its IR35 guidance may prompt others to rethink how they assess contractors, said Seb Maley, CEO of tax advisers Qdos Contractor.
“It is great news for all public sector contractors and the public sector itself,” he said. “Prior to the recent reform, a staggering 85% of contractors said they would stop working in the public sector should they be placed inside IR35. And contractors are vital components of all major public sector projects, particularly the NHS.”