HMRC: Contractors, don't worry about IR35 reforms in private sector 'cos it all went so well in public sector

Finds half of public-sector orgs determine contractors' IR35 tax status without outside help

Britain's tax collection agency has released a survey whose results downplay the impact of IR35 tax reforms in the public sector, apparently showing those in the private sector that everything went swimmingly.

The study [PDF] commissioned by Her Majesty's Revenue & Customs (HMRC) in 2020 to look into the "longer-term" impact of the rule change for public servants, was supposed to be released just before it rolled out the reforms to the private sector.

The research showed that in the public sector, 24 per cent of contractors were classed as falling "inside" IR35, the anti-avoidance tax legislation. This means they will be taxed as employees, not as self employed contractors.

However, a small proportion of the public-sector orgs (11 per cent) and central bodies (12 per cent) decided that every single one of the contractors working for them fell inside the rules after undertaking status determinations. At the same time, about 48 per cent of public sector bodies found none of their contractors were assessed as falling inside IR35.

The survey was carried out by IFF Research. Its field studies were interrupted due to COVID-19 related lockdowns.

The report focuses on the impact of the 2017 reform to IR35 – which applied to the public sector only – and ruled that an individual's IR35 status would be determined by the client, not the contractor. The study looked at the readiness of public authorities for the 2021 changes in the private sector, which mean medium and large employers determine their contractor tax status across the economy.

It also found that 72 per cent of those surveyed claimed there was no change in the number of off-payroll (those deemed outside of IR35) contractors operating in the public sector between 2017 and 2020.

However, The Reg revealed in early 2017 there were 18,000 tech contractors working for UK.gov and ahead of the introduction of IR35 a wave of them decided to quit due to worries about changes to the tax legislation. We detailed the changes here.

Project delays, and the NHS doing a U turn on its policy towards IR35 were among some of the consequences of IR35 reforms in the public sector.

What is IR35?

IR35 is a reform unveiled in 1999 by the UK tax authorities. The latest regulation change – which came into force in April 2021 – forces medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.

Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The measures first came into effect in the UK public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.

Seb Maley, CEO of IR35 insurance provider Qdos, was critical of the research.

"This study suggests the impact of IR35 reform in the public sector was minimal, despite there being plenty of evidence out there to contradict this. It even goes as far to say that nearly half of public sector bodies have not assessed any contractors inside IR35 whatsoever. While a welcoming statistic, I'm taking it with a pinch of salt – blanket IR35 determinations were commonplace in the public sector," he said.

Maley, whose firm also provides employment status services, pointed out that no contractors had contributed to the research and only the views of public-sector organisations had been researched. "It's difficult to get a true sense of public sector reform if you aren't going to ask the individuals who have been directly affected by the changes," he said.

Some public-sector organisations have already fallen afoul of IR35 rules in spectacular fashion. Financial reports from the Ministry of Justice and the Department for Environment, Food and Rural Affairs (Defra) last year showed the departments are facing combined additional tax bills of at least £121m due to incorrectly determining the status of their contractors, despite following HMRC'S "accompanying guidance" and using the Check Employment Status for Tax (CEST) tool. ®

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