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Public sector contractors will need proof of IR35 status to avoid HMRC inspection

Public sector contractors can complete assignments without fear of an HMRC IR35 investigation initiated by the newly introduced off-payroll rules if they can prove that they are outside IR35. This is according to HMRC and HM Treasury officials who met with representatives of the Association of Professional Staffing Companies (APSCo) last week.

HMRC’s main contact with APSCo, Sarah Radford, is an IR35 Forum member and lead on the controlling persons legislation; she noted that the off-payroll rules “are not a sampling exercise on behalf of HMRC”.

She also confirmed to APSCo that HMRC lacks the resources to provide assurance to all government departments about the IR35 status of their contractors.

Also in the meeting with APSCo was HM Treasury Workforce, Pay and Pensions Team member Natalie Toms. She highlighted that the Treasury’s expectation is that not every contractor will be asked to provide assurances that they are outside IR35 and paying the correct tax and National Insurance Contributions (NICs).

“[The] Treasury is not necessarily expecting hiring managers to [seek assurance] in every single off-payroll situation, but probably sample a percentage of such arrangements,” Toms explained.

APSCo flagged its concerns that the largely untested business entity tests are being used to determine whether contractors are paying the correct amount of tax: “These tests are still in their trial phase, and APSCo has made HMRC aware of its concerns regarding the scoring of these tests, which is disproportionately weighted against personal service companies.”

APSCo went on to say: “Contractors would have one of two choices to deliver the proof required by public sector clients that they are paying appropriate tax – either pay for an independent review for each new assignment (IR35 legislation being assignment-driven), or use HMRC’s free contract review service.”

Despite the concern that the off-payroll rules could drive Limited company contractors out of the public sector, it seems that HMRC and the Treasury are not “anticipating a huge upheaval”, in the words of Toms.

According to APSCo, Radford and Toms “were clear that the Treasury guidelines are not about tax avoidance, but rather about stopping disguised employment.”

APSCo concludes: “We are certain that there is a clear understanding within HMRC and Treasury that not all off-payroll arrangements constitute tax avoidance ... although there is clearly some way to go in getting this message across in the political arena, as borne out by the findings of the Public Accounts Committee report.”

Published: 17 October 2012

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