Public sector to face significant upheaval if plans to reform IR35 test go ahead

HMRC’s current consultation on ‘Off payroll working in the public sector’ is causing consternation amongst recruiters and employment intermediaries, their clients, as well as contractors and interims.

In a consultation that closes next week (18th August), HMRC suggest that the liability for deciding if IR35 applies or not to those contractors and interim managers working via Personal Service Companies (PSCs) in the public sector, should shift from the contractor to the hiring business – whether that is a recruiter, employment intermediary or client. If a contractor is found to be “inside IR35” the hiring business would also be required to deduct Income Tax and National Insurance before paying the balance to the PSC.

In a recent survey of public sector clients by the Recruitment & Employment Confederation (REC), we found that the majority of employers felt they did not need this change, as in their view they are already clear on how to assess IR35. 65 per cent of clients responding to the survey said they are very confident (18 per cent) or somewhat confident (47 per cent) in assessing if an interim manager or contractor is in or out of scope for IR35. A further 22 per cent said that they did not need to know if IR35 applies as under the current rules, this is the responsibility of the contractor / interim.

How confident are you with assessing if an interim manager / contractor is in or out of scope for IR35?

Of course, if HMRC’s consultation proposal goes ahead the contractor will no longer bear liability for their tax status. We believe this would be deeply flawed as it is only the contractor or interim manager who will know the specifics of their tax arrangements and their current work assignment.

But most worryingly of all the changes look like they could damage the public sector’s ability to attract the highly skilled interims and contractors they so desperately need to keep delivering public services. When we asked public sector employers in the same survey what they think will happen if government brings in this proposed crackdown on people working via their own PSCs in the public sector:

  • 43 per cent thought that fewer interim managers and contractors will want to work for them;
  • 26 per cent felt that they will have to decrease their use of contractors and interims;
  • Only 10 per cent thought this would make no difference to their work

What do you think will happen if government crackdown on interims / contractors working via a Personal Service Company, bringing more into scope of IR35?

At a time when the public sector is struggling to recruit people because of a growing shortage of people with the right skills, this is also troubling.

HMRC say the change is needed because currently, they think that too few people operating via a PSC pay the right level of tax; with non-compliance costing the Exchequer £440 million this tax year by their estimate. But a recent report by HMRC’s own research team into changes around the intermediaries legislation found that:

“Many used temporary staff and considered them to be central to the success of their business – primarily in terms of the flexibility and skills they provided… Businesses saw the changes as being potentially costly, burdensome and constraining. This concern was shared even by those who rarely used PSCs.”

There is no doubt that HMRC should be enforcing the rules better. But in light of the REC’s survey findings and the wealth of supporting evidence out there, we believe that government should conduct a wholesale review of IR35 and at the very least, delay the implementation of this proposal rather than rushing it in for April 2017.

It is HMRC’s plan to develop a new online tool to help all stakeholders assess IR35 status – and this really could help if the tool was nuanced enough that it could come to an intelligent result. But paper versions of the tool seen by the REC so far have alerted us to the fact the tool is not ready and a planned testing phase for ‘Autumn’ will not give stakeholders confidence that it will have been adequately piloted in time for rollout by April 2017. It is also not clear who will complete the tool – whether the end user client, the employment intermediary or the contractor, or if it will be mandatory to complete the test. In our view, it is the contractor- with the public sector client – who are best placed to provide the information HMRC requires.

The consultation closes on 18th August. REC will be submitting its response on behalf of the industry and encourages all members to submit their own response and to engage with clients and contractors to make sure they get their chance to have a say ahead of the consultation deadline.

REC members are invited to give their feedback on the consultation and next steps by contacting kate.shoesmith@rec.uk.com or lewina.farrell@rec.uk.com.

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