Contractors are leaving the public sector as a result of the off-payroll rules, and HMRC is focusing its IR35 compliance activity on those contractors who remain with public sector clients.
“Almost all of the new HMRC IR35 investigations we’ve been handling have been for contractors working in the public sector,” highlights Seb Maley, director of Qdos Status Services.
“We’re also seeing many contractors who have experienced difficulties with the off-payroll rules simply handing in their notice and leaving the public sector as a result of the hassle and stress.”
HMRC’s targeting of public sector contractors for IR35
According to Maley, the number of contractors working for public sector clients who are the target of a new IR35 inquiry instigated by HMRC has risen dramatically when compared to previous years.
“Although there is no firm evidence to support this, we know unofficially that HMRC is getting its IR35-risk intelligence from public sector clients,” says Maley. “It is possible that contractors who can’t provide assurance of their tax status according to the requirements of the off-payroll rules are having their files passed on to HMRC by their former public sector client.”
Although there is no firm evidence to support this, we know unofficially that HMRC is getting its IR35-risk intelligence from public sector clients
Seb Maley, Qdos Status Services
Maley fears that this deliberate attack by HMRC on contractors working in the public sector may worsen: “HMRC has enjoyed increased IR35 resources since the introduction of the new IR35 compliance framework in May 2012, so now has the manpower to mount a large-scale campaign.”
Contractors leaving the public sector directly because of the new rules
Concerns are being realised that the public sector may suffer a contractor brain drain as a result of the off-payroll rules introduced in September 2012, and will lose access to vital skills and capabilities.
Maley explains: “The enforcement of the rules is highly variable, but what we are seeing is contractors just giving notice of termination when faced with repeated requests for ever more detailed information from their clients.
“Some of the worst public sector department offenders are forcing contractors to show evidence that they are making a deemed payment, even though our analysis of their status shows they are outside IR35. The result is that the contractor just leaves and finds a contract with a private sector client.”
Poor guidance and a lack of IR35 understanding
In response to the off-payroll rules and the difficulty contractors are having to demonstrate ‘assurance’ that their tax affairs were in order, Qdos launched a Public Sector IR35 Solution.
It provides a review of the contract and working practices, conducts the business entity test and then gives advice, resulting in a ‘pack’ with a document describing all the positive facts of the situation and a certificate that a contractor can forward directly to their public sector client. Qdos has so far supported over 350 contractors with such ‘assurances’.
Maley says that the usage of the solution has thrown up some interesting trends: “The lack of guidance and clarity is resulting in a wide range of interpretation and application of the rules by different public bodies.
“The problem is that the decision makers within these organisations just don’t understand the IR35 legislation, and focus too much on the business entity tests and not enough on the true facts.”
Contractors suffering highly variable experiences
Some, mainly smaller, departments tend to be more accepting of contractor assurances without question. Other, larger, departments have created huge barriers. Local authorities appear to be much less familiar with the rules and their application than central government departments.
“It’s well documented that specific departments such as the Ministry of Justice and the Cabinet Office have proved to be particularly troublesome for contractors,” continues Maley.
“Central government departments have been more cautious and are more likely to question the evidence. On some occasions we’ve had to engage directly with the end-user public sector client and educate them about what the business entity tests and IR35 mean.”
Maley concludes: “There is no doubt that the public sector is now losing access to contractors with key skills, who are leaving contracts because of the sheer hassle the off-payroll rules present.
“And it seems likely that HMRC’s focus on targeting public sector contractors for IR35 inquiries is no accident, as the surge in cases is both unprecedented and coincides with the release and implementation of the off-payroll rules.”