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Public sector contractors may be driven out if off-payroll guidance is implemented

Contractors may be driven out of the public sector altogether, resulting in significant damage to service delivery capabilities, if official off-payroll guidance leaked to PCG is implemented by government departments.

“The harsh reality of this move will be to remove public sector access to freelance expertise and bluntly threatens to destabilise many government departments,” says PCG managing director John Brazier. “It is vitally important the government does not undermine the UK’s vibrant flexible workforce.”

Under the new guidance, PCG predicts that thousands of experts engaged on short-term project work will be forced out, leaving bodies like the NHS and the Ministry of Defence without access to vital resources, such as mission-critical IT contractors and frontline healthcare professionals.

Leaked guidance from BIS to department heads

PCG has obtained guidance from the Director General Finance & Commercial Group of the Department for Business, Innovation and Skills (BIS) sent to accounting officers and CEOs of government departments.

I do not believe the Government fully understands the consequences of these measures

John Brazier, PCG

Effective from 15th September 2012, it will require all off-payroll workers earning above £219 per day, or on a contract for 6 months or longer, to take HMRC’s Employment Status Indicator (ESI) tool to demonstrate their self-employed status.

Contractors failing the test will either be forced to go on the payroll of their client, implement IR35 or prove that their contract is outside IR35 by using HMRC’s business entity tests or HMRC’s IR35 contract review service.

HMRC is behind the measures

PCG has obtained further documents that identify a working group established by the Treasury as the source of the “assurance guidance”. The following excerpt confirms that HMRC is ultimately behind the proposed measures:

“HM Treasury has set up an implementation working group which BIS attends fortnightly and this will afford us an opportunity to raise and address any issues. I attach a draft Assurance Guide for Departments that is being developed by HMRC and reviewed by the implementation working Group.”

PCG’s source also confirmed that the government “was intending to impose terms and conditions on agencies that supply ‘off-payroll’ workers to enforce the new rules.”

ESI ‘extremely poor’ tool to determine employment status

ContractorCalculator CEO Dave Chaplin, who designed ContractorCalculator’s free online IR35 test, agrees with PCG’s assessment that the ESI is an ‘extremely poor’ tool.

“ESI is simply not designed to take into account modern working practices and will point most contractors to the ‘don’t know’ answers,” says Chaplin. “Unless they have substituted, workers following the classic contractor model will almost certainly be classed as employees regardless of their real status.”

When PCG tested the tool on some of its members to determine the status of a typical contractor, it found that the ESI was unable to come up with an answer. PCG’s view is that the questions asked are limited in their scope, and only take into account a small number of relevant factors.

“The result will be contractors forced to take the Business Entity Tests (BETS) and asking HMRC to review their contracts, which is akin to asking a barber if you need a haircut!” observes Chaplin.

Contractor loss may “destabilise” entire departments

Sources close to PCG within the civil service have indicated their great concern about the new rules, with one describing HMRC as being on a ‘witchhunt’. “A large number of contracts are due to be renewed in October and that could destabilise entire departments,” one senior civil servant told PCG.

Despite Chief Secretary to the Treasury Danny Alexander’s statement to parliament in which he acknowledged that the rules are not intended to target experts such as IT contractors, there is no exemption mentioned for any kind of specialist or rare skill.

Civil servants have already flagged the NHS and the Ministry of Defence as particularly heavy users of contractors, and therefore likely to be seriously affected by the impact of the guidance.

PCG taking swift action to protect contractors’ interests

Since the leaked guidance has come into PCG’s possession, the professional body has reacted swiftly to protect contractors’ interests. Chairman of the All Party Parliamentary Group (AAPG) for the Freelance Sector Brian Binley MP has already tabled parliamentary questions at PCG’s request.

PCG is seeking a meeting with Alexander as soon as possible. It has also written to Minister for the Cabinet Office and Paymaster General Francis Maude, to “express concern that these measures undermine the Government’s stated commitment to award 25% of Government spending to SMEs.”

Contractors currently working within the public sector are urged to share their experiences by contacting PCG at its dedicated email address for the issue: publicsectorreview@pcg.org.uk.

“I do not believe the Government fully understands the consequences of these measures,” concludes Brazier. “PCG will do its best to highlight these issues to Ministers and MPs [and] will also work tirelessly to protect legitimate freelance businesses in the private sector.”

Published: 23 July 2012

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