The UK National Health Service has repealed its blanket decision to shove contractors inside the IR35 tax clampdown by default.
Last month the government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency. The Treasury says it hopes to raise £185m for 2017/18 by bringing public sector contractors within the scope of the legislation.
In an update [PDF] NHS Improvement, which is responsible for overseeing foundation trusts, said it had previously "anticipated that providers would need to ensure that all locum, agency and bank staff were subject to PAYE and on payroll for the new financial year".
However, it has admitted that blanket IR35 determinations were "not accurate" and now plans to carry out those decisions on "a case-by-case basis" rather than by a broader classification of roles.
In a letter sent to NHS providers in February, seen by The Register, NHS Improvement said: "There is still far too much use of Personal Service Companies (PSCs) to avoid tax. New HMRC rules coming into effect in April will have a material impact on this.
"HMRC will treat all public sector 'self-employed' contractors using a PSC as falling under IR35 and therefore treated for tax purposes as an employee. As a result of these new rules, we anticipate that providers will need to ensure all locum, agency and bank staff are subject to PAYE and on payroll from 1 April 2017."
Tax advisers Qdos Contractor welcomed the move. Chief exec Seb Maley said: "The final IR35 legislation clearly stated that 'reasonable care' had to be taken when making decisions over the IR35 status of public sector contractors. Put simply, this means that public sector employers and agencies should not make blanket determinations."
If public sector bodies fail to take take reasonable care over the rule changes, they will be responsible for deducting PAYE and National Insurance, and for paying Employer National Insurance rather than the contractor.
Earlier this year, Contractor UK reported that 30 contractors abandoned an overrun £16.5m health service IT project after an NHS trust said it would declare them all inside IR35 from 6 April.
Dave Chaplin, chief exec of ContractorCalculator, said that many public sector firms have discovered that blanket rules have had a hugely negative impact and highly skilled contractors have been leaving the public sector in droves.
"We have heard countless stories of private firms trying to lure locums to the private sector only for the NHS to increase the locum's rates to counter the effects of blanket decisions. The IR35 reforms have been tantamount to a massive extra tax on the NHS and have led to utter chaos." ®