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IR35 public sector consultation ‘a done deal’, warn contracting experts

Contracting stakeholders believe that HMRC’s IR35 public sector consultation is “a done deal”, as the taxman moves one step closer to implementing its draconian public sector IR35 reforms with the release of a new consultation document.

Experts fear that changes to make public sector clients and agencies responsible for IR35 compliance, planned to take effect from April 2017, will then be rolled out to the private sector.

Off-payroll working in the public sector: reform of intermediaries legislation sets out plans to implement changes to IR35 in the public sector as opposed to focusing on whether it should be implemented at all, in doing so confirming the suspicions of many.

“From day one it has seemed that the Government fully intended to press ahead with these plans, despite all of the warnings,” highlights ContractorCalculator CEO Dave Chaplin. “This consultation extinguishes any remaining hope that HMRC will listen to reason.”

“Government and policymakers frequently wax lyrical about the value of the flexible workforce, but this is not demonstrated by their actions,” adds Freelancer and Contractor Service Association (FCSA) CEO Julia Kermode.

HMRC’s latest IR35 consultation makes its intentions clear

Whilst some hoped the consultation would seek feedback as to whether IR35 reform in the public sector should proceed, instead it looks to develop plans as to how it can be implemented.

“The fact that the consultation delves into the technicalities of the proposals effectively shows that it’s a done deal in the Government’s eyes,” notes Seb Maley of IR35 consultants Qdos Consulting. “We spoke to recruiters and the consensus was that it was definitely going to go ahead even prior to the consultation, so there are no real surprises here.”

Maley is amongst the majority who expect a private sector roll-out of the measures to follow if – in the Government’s eyes – all goes well in the public sector. Issuing a warning to the sector, he adds:

“It seems quite clear that this is HMRC’s intention for the private sector. Contractors in general need to read and understand this consultation now because it could affect them in the very near future.”

Agencies likely to be hit hardest with administrative burden

Although much has been made of the administrative burden that engagers will be faced with, the consultation confirms that public sector bodies won’t have to give a contractor’s status any further consideration in the instance that they are provided by an agency. For Maley, this looks likely to create a large shake-up amongst agencies who will feel the strain far more than end clients.

“I think it’s very rare that you will find a contractor in the public sector who doesn’t operate via an agency. A lot of emphasis has been placed on the impact on the public sector, but ultimately in the majority of cases it’ll be the agencies who have to assume responsibility.

“It’s going to cause a huge headache for them and the key thing is how they’re going to react. I think we will start to see movement in the industry very soon. Agencies will be more hesitant to take on contractors in some cases, especially those working outside of IR35 in the run up to April 2017.”

HMRC ‘gateway process’ massively oversimplified

The consultation outlines a new gateway process that HMRC plans to introduce to help engagers and agencies easily decide whether the rules need to be considered.

Working through its admittedly simplified process map, HMRC determines that an agency can arrive at a decision as to whether they should consider a contractor’s status off the back of a maximum of four yes/no questions.

“It’s massively oversimplified and there’s very little we can gather from this,” highlights Chaplin. “HMRC has told us nothing new here. Its hypothetical example of a human resources manager providing maternity leave also goes to show that HMRC has little understanding of the various circumstances where contractors operate.”

HMRC ‘digital tool’ still a work of fiction

A prominent point of contention amongst contracting stakeholders ever since the public sector reform was outlined has been HMRC’s ambition to develop an online tool to determine a contractor’s IR35 status.

“I don’t have any confidence that HMRC will be able to develop a tool that can give any accurate certainty over IR35 status,” comments Maley. “I thought we were going to be seeing a beta version of it around this time but we haven’t seen or heard anything yet.”

Despite providing no further insight as to how the tool will work within its consultation, HMRC has given itself a vote of confidence by claiming it will provide ‘upfront certainty’, and a decision that the taxman will be ‘bound by’. For Maley, this is a bold move considering its track record with similar ventures.

“HMRC seems quite sure of itself when talking about this online tool. This is quite concerning when you consider that nothing it has ever released in this regard has ever worked. Take the business entity tests for example.

“One of the main risks is that, if any results are somewhat indeterminate, whatever test is created will err on the side of caution and determine that the contractor is caught by IR35.”

Contractors face long-winded process to dispute status

“Contractors know as well as anyone about HMRC’s track record with regards to guidance, tools and so on,” Maley continues. “Personally, I wouldn’t trust it, and I don’t expect that contractors will trust it.”

With the wider contracting sector similarly dubious, disputes over contractor status are expected to come thick and fast. In anticipation of this, the consultation underlines the process through which contractors can appeal against their tax and National Insurance (NI) liability, noting that reviews must be carried out before tribunal.

The extent to which contractors are expected to go to reverse a decision may or may not be a deliberate ploy from HMRC to deter contractors from contending their decisions. It would seem that taking a case before a tribunal would mean a contractor loses out on the contract in almost every instance.

“The exhaustive process that a contractor is supposedly meant to go through to change their status is ludicrous,” notes Chaplin. “The likelihood is any contractor faced with this prospect will either decide to increase their price or work elsewhere.”

As Maley highlights, there are further disincentives to taking this mode of action: “From a contractor’s perspective – as with HMRC’s contract review service – there is always a fear that interacting with HMRC in such a way could cause HMRC to examine a contractor’s situation more closely.”

Public sector skills shortages to intensify

Ultimately, a migration away from the public sector by contractors seems inevitable. Maley points out that contractors will know agencies will be far more inclined to take on contractors inside IR35, and will subsequently look elsewhere for contracts.

“Public services will suffer badly from these plans,” adds Chris Bryce, CEO of the Association of Independent Professionals and the Self Employed (IPSE). “These talented experts will simply shun the public sector and take on private sector work instead. The only winners will be the large consultancies drafted in to fill the void.”

For Kermode, contractors could fall out of favour with potential end clients, as she concludes: “The implications of the proposed changes will be significant – the new legislation could see contractors discriminated against as hirers choose alternatives to fulfil their staffing needs. It’s a no win situation in an already stretched public sector.”

Updated: 05 April 2017

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