96% of the 2,505 public sector contractors working within central government departments and the NHS have demonstrated that their tax affairs are in order and that they are compliant with the off-payroll rules.
However, in its second evaluation of tax arrangements for off-payroll contracts in the public sector, HM Treasury has identified 94 contractors who cannot confirm their tax position. These contractors’ contracts have been terminated and they have been reported to HMRC as a result. Two departments have also been fined for not complying with the rules.
“I introduced tough new rules to tackle tax avoidance by off-payroll workers in the public sector in 2012,” highlights Chief Secretary to the Treasury Danny Alexander, “and it’s heartening that the vast majority of departments are compliant in ensuring that all their contractors are paying the correct amount of tax.”
“The Treasury review for 2013-14 shows that where senior or higher paid workers have been unable to provide assurance that they are paying the right tax, their contracts have been terminated and their details passed to HMRC.”
How the off-payroll rules affect public sector contractors
The UK public sector off-payroll rules require that any contractor on a contract with a public sector client lasting more than six months, or earning more than £219 per day, must be able to demonstrate to their client that they are paying the correct amount of tax, or that they are operating IR35.
According to the Association of Independent Professionals and the Self-Employed (IPSE), the rules were brought in following the revelation that the then chief executive of the Student Loans Company, Ed Lester, was engaged via his own limited company. “As a knee-jerk reaction to intense media pressure, the Chief Secretary to the Treasury, Danny Alexander, hastily compiled a set of rules which forced all public sector contractors to provide assurances about their tax arrangements,” says IPSE.
Failure to comply results in the contractor’s contract being terminated and the contractor being reported to HMRC. Since the rules were introduced in September 2012, thousands of contractors have been investigated by HMRC as a result, as their public sector clients has handed their details over to the taxman.
Fines for public sector clients failing to comply
Public sector clients that fail to abide by the rules are also punished. As a result of this latest review the Ministry of Defence has been fined £1m “for failing to seek assurance from a number of workers on their tax arrangements due to administrative error in 2012-13”.
According to the Treasury: “The Department of Health will be sanctioned £470,740 for two breaches at NHS England, where two board members were off-payroll for over a year. In both cases the individuals provided the necessary assurance to NHS England regarding their tax arrangements.”
“While 95% of government departments are broadly following the new rules,” continues Alexander, “the Ministry of Defence and an arm’s length body of the Department of Health have not been able to fully satisfy the strict rules. I am imposing fines on these departments as a result.”
Off-payroll rules “unnecessary, unwise and unclear”
Andy Chamberlain, deputy director of policy and external affairs at IPSE believes that the rules are “are unnecessary, unwise, and unclear and in any case have been unevenly and unfairly implemented by departments”.
He explains: “The public sector tax rules are a sledge hammer to crack a nut. What was designed to prevent clear tax evasion by board level staff has now destabilised the position of specialist contractors and the projects they are working on.
“Government has a responsibility to ensure that the specialists with the right skills, who are very often independent professionals, are not driven out of the public sector by these rules. In the case of the Ministry of Defence, this is a matter of national security.”
The business entity tests (BETs) used as an IR35-substitute
According to Chamberlain, many public sector clients continue to use the business entity tests as a proxy for the IR35 legislation. This is despite the fact that the tests have been discredited and are to be abolished from April 2015.
“It has been widely accepted,” continues Chamberlain, “even by HMRC, that the BETs are not fit for purpose and are scheduled to be scrapped from April. Despite this we understand they are still being used by some departments as part of their assurance process.
“The next government should as a matter of urgency undertake a full review of the need for this unnecessary burden on independent professionals in the public sector.”