Public sector bodies begin fightback against draconian IR35 reform

With only two months until the public sector IR35 reform, public sector bodies (PSBs) are becoming increasingly worried about holding on to their contractors.

As ContractorCalculator warned several months ago, public sector contractors are making it clear that they will not be bundled into contracts caught by IR35, forcing the hand of clients.

Recently we heard that Transport for London (TfL) is considering withdrawing a blanket ban on limited company contractors after realising the impact it would cause.

One source tells us that roughly a third of PSBs are unhappy with the stance HMRC is taking and want a way out. Well aware of the inadequacies of HMRC’s Employment Status Service (ESS) tool, organisations are looking to their supply chains for ways to help them retain their staff.

TfL misfire proves contractors won’t budge on IR35

PSBs aware of the administrative burden of complying with IR35 are desperately looking for ways to mitigate their impact whilst retaining the contractors that are so vital to their operations.

TfL issued a ‘take it or leave it’ offer when it informed staff that it would no longer engage limited company contractors. Instead, it invited contractors to convert to Pay As You Earn (PAYE) or umbrella worker status, or walk.

An August 2016 ContractorCalculator survey found that 80% of contractors would sooner seek other opportunities than accept an inside-IR35 contract. In keeping with these results, TfL’s contractors stood their ground. Realising the damage the move would cause its workforce, we hear that TfL is reconsidering its stance.

Will contractors accept public sector rate hikes?

Another source tells us HMRC’s estimation that 26,000 contractors will be affected by the changes is a low estimate, with the figure more likely in excess of 50,000.

So it’s somewhat understandable that organisations are attempting to alleviate the potentially huge impact these reforms will have on them. The Home Office is rumoured to have questioned how much contractor rates will have to increase by to account for the tax loss with a view to just paying contractors more.

The simple answer to this is roughly 20%. But how many public sector departments are going to be granted 20% more funds to keep hold of existing staff? For the few that can afford to, ramping up contractor rates may still not be enough to persuade contingent workers to stay.

For departments with no ability to increase total budgets it could mean they will have to reduce their contractor headcount by a sixth, and therefore their capability to deliver, just to hold onto the rest. Some projects may need to be cancelled.

The taxman has also refused to rule out taking retrospective action against contractors who engage inside-IR35 contracts after 6 April. Contractors are well aware of the unwanted, and often unwarranted attention rolling over and accepting an inside IR35 status could attract. The simplest option is to jump ship and move to the private sector.

HMRC’s ESS tool – ‘it is not a dog until it goes woof three times’

HMRC’s ESS tool (yet to be released) is providing PSBs with little comfort. Aware that the tool will err too far on the side of caution, its little wonder organisations are seeking alternative routes to ensure compliance and retain their contracting workforce.

The ESS's tool has many problems:

  • HMRC want their result to be binding, which means they can only really pass a contractor if they have absolute certainty they have passed IR35. This will only apply to a fraction (perhaps 10% at most) of contractors because it is not in HMRC's DNA to give tax payers the benefit of the doubt.
  • HMRC are apparently targeting certainty for 90% of contractors. The only way they can achieve this is to cheat - and say anything without a high pass must be outside IR35 - logic which is fundamentally flawed and will result in false positives.
  • We know ourselves, from the 100,000+ results from our own test since 2009, that around 30% will pass, 30% will fail, and 40% will be borderline.
  • HMRC's view of IR35 and interpretation of the employment case law is inaccurate. Time and time again they state that people doing the same type of work and sitting in the same office should pay the same amount of tax. But, that's not actually what the law says.

So, we have an HMRC tool that misrepresents case law, and spits out false positives when they do not see absolutely certainty.

To highlight how silly this is, imagine you have a closed box with a few holes in and the words ‘cat or dog’ written on it. Hector, an ex-HMRC inspector would start by stating that they assume it is definitely a cat. A trained expert, on the other hand, might get close to the box and say that it really does smell more like a dog. "No", the inspector would say, "Until I hear it go woof three times in a row it must be a cat." "But it's woofed twice...," says the expert. "Doesn't matter, " says Hector, "Three woofs in a row is our standard for ascertaining whether it is a dog or not."

And here's the worry. There has been tremendous pressure on all PSBs to use HMRC's tool. In fact, many PSBs until they have been recently told by providers, thought it was mandatory. It isn't, but given the rhetoric in lots of the HMRC guidance it's not surprising they originally took this view.

To be fair to HMRC though, they have been put in a position whereby their tool was never going to deliver what it needed to. They were snookered from the start, having tasked themselves with building a tool that provides certainty, where absolute certainty isn't possible. And they have tried to do this in months, not years.

Comparing HMRCs tool with our new tool

To put HMRC's challenge into perspective, consider our new version of the IR35 test (released in February):

  • Had 7 years of ongoing development and has been used by 100,000 contractors.
  • We ask 101 questions, which is almost double what HMRC are asking.
  • The IR35 result is on a 19 point scale, not a binary one.
  • We provide a detailed breakdown (30+ page report) in all areas and state what needs to be fixed.
  • For those that pass, a Pass Certificate is included, which can be directly used to demonstrate reasonable care has been taken.
  • The focus is helping all parties get their contractors over the IR35 pass line, as opposed to falsely condemning them

Our new tool is free to use for contractors to get an initial result, and in massively scalable - we could in theory test the entire contracting market in an afternoon. It can also be white labelled by recruiters, accountants, and tax advisors. We charge £25 for the detailed analysis report that indicates areas of weakness and how to improve IR35 status. If you would like to know more then please contact the team. Or, simply - just take the test to see how it works.

How can PSBs keep their contractors?

Simple: Follow our 6 step plan. This will ensure workforces aren’t stretched and projects don’t suffer. Otherwise that public sector contractor exodus will become a reality.

Published: Monday, February 6, 2017

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