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Public sector IR35 reforms called into question after HMRC figures proven wrong

Contracting bodies have called the Government’s public sector IR35 reform plans into question after a Public Accounts Committee (PAC) report indicated that tax compliance amongst contractors is far higher than HMRC has suggested.

Use of consultants and temporary staff’ quotes figures gathered from various Government departments, concluding that roughly 90% of public sector contractors are compliant from a tax perspective.

This comes after media reports prior to the Budget 2016 claimed that the compliance rate was in fact 10%, with HMRC estimating that the changes would net the Exchequer an extra £400m in tax. More recently, representatives from HMRC and the Treasury maintained these figures at a recent compliance seminar, but were not able to elaborate any further when asked to do so.

“The figures highlighted within the PAC report serve to reaffirm what the contracting community has known all along,” highlights ContractorCalculator CEO Dave Chaplin. “Non-compliance does exist, but not to anywhere near the extent that the Government claims.”

Government non-compliance figures massively warped

The PAC report quotes research carried out by Government departments seeking assurance on the tax affairs of contractors. The figures show that, in 2013/14, departments received satisfactory assurances from 2,248 contractors out of 2,505, which equates to roughly 90%. In the remaining 257 cases, contracts were terminated or came to an end before assurance was received.

“With such stark contradictory figures in the public domain you could be forgiven for not knowing which to believe,” notes Freelancer and Contractor Service Association (FCSA) CEO Julia Kermode. “The PAC data is credible and evidence-based, and the results clearly prove 90% compliance.

“By comparison, there does not appear to be any substantiated data to support HMRC’s 10% compliance claim, or at least none that they are able to share publicly.”

False figures used to justify public sector reforms

“The fact that the Government can’t provide any proof supporting its 10% compliance claims goes to show that it’s all a ruse,” adds Chaplin. “This has all seemingly been whipped up in a bid to generate bad publicity for the contracting sector and try to justify public sector IR35 changes in the process.”

During the Budget, the Chancellor announced plans to switch the responsibility for determining whether or not a public sector contractor should be on payroll onto the public sector client, which will also be required to deduct tax and National Insurance Contributions (NICs) at source.

The Government also plans to develop a simpler set of tests and online tools to provide a determinate answer as to a contractor’s status in any given case. These plans are expected to come into effect from April 2017, with the PAC noting the Government’s estimations that they will raise an additional £555m in tax by 2020/21.

However, the main concern within the contracting sector is that public sector bodies will adopt a risk-averse approach, resulting in contractors being unjustly subject to Pay As You Earn (PAYE) income tax as clients seek to avoid being penalised for non-compliance.

Government contractor reliance likely to be sustained

Whilst the purpose of the report is to advise on how the Government can reduce its spend on contractors, it does concede that the Government is heavily reliant on contractors to provide access to skills which often aren’t otherwise available.

This reliance is expected to be sustained over the coming years. The PAC expresses concern that the Cabinet Office doesn’t have a clear strategy to reduce the Government skills gap, and that departments have made no progress with their workforce planning.

After introducing new spending controls requiring departments to obtain ministerial approval before appointing contractors in 2010, the Government saw a sharp reduction in contractor spend. However, spend on contractors within departments has since increased by up to 90% since 2011/12 to between £679m and £775m in 2014/15.

“The fact that Government spend on contractors continues to rise, despite its obvious preference for engaging permanent staff, goes to show how valuable the contingent workforce is to the public sector,” notes Chaplin. “By introducing IR35 reforms, it’s not only inhibiting contractors, but it’s also shooting itself in the foot.”

“I would argue that it is inappropriate to persevere with a consultation which appears to have no supporting evidence, and where the rationale seems fundamentally incorrect,” Kermode concludes. “The implications of the proposed changes will be significant, and based on the Government’s own findings there seems to be no justification for reform.”

Updated: 05 April 2017

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