Freelancers and contractors could be forced out of the public sector by planned changes to the way off-payroll staff are monitored, the government has been warned.
Tax experts and industry bodies have urged HM Revenue and Customs to reconsider its plans to switch responsibility to public sector bodies for applying an established but controversial tax rule intended to counter arrangements designed to disguise employment.
Amid claims that the change could lead to an exodus of contractors, HM Revenue & Customs told CSW that the “genuine self-employed” would not be affected. “This measure is about public sector workers paying the right tax,” a spokesman said.
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The government proposes that, from next year, a public sector body engaging a worker whose services are provided by a personal service company (PSC) will be responsible for operating the intermediaries legislation, known as “IR35”.
The current rules require the PSC itself to determine whether the engagement is caught. IR35 applies where the worker would be regarded for tax purposes as an employee if the services were provided directly to the engager. The PSC accounts for tax and national insurance contributions (NICs) on “deemed employment” income.
But the Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) has said public sector bodies are likely to be “more risk-averse” than PSCs when assessing whether or not a particular contract is caught.
“The damage this will have on public services and the flexible economy is too great to ignore" – Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed
“This will result in the IR35 rules being applied more frequently and in cases where tax law does not indicate employment status,” it said.
On the other hand, departments responsible for procurement, payroll and the workplace may be remote from one another and those involved may not realise that IR35 needs to be considered, the Faculty said.
Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed (IPSE) said the government was approaching the problem of non-compliance with the intermediaries legislation in “completely the wrong way".
He added: “The damage this will have on public services and the flexible economy is too great to ignore.”
HMRC in March said the proposals were designed to combat “widespread” non-compliance with IR35, rules that it said many people find confusing.
“Many public sector bodies are already required to check some of their off-payroll workers are paying the correct taxes,” it noted in a May 2016 consultation.
Procurement rules require that “for any individuals engaged for more than six months and paid more than £220 a day, departments … must include a contractual provision that allows the department to seek assurance that the worker is paying the correct amount of tax and NICs and to terminate the contract if assurance is not provided.”
The proposed change will “strengthen” this responsibility, HMRC said.
But the plan is “dangerous”, according to IPSE, which represents freelancers, contractors and consultants.
"Many public sector bodies are already required to check some of their off-payroll workers are paying the correct taxes" – HMRC
“It will force contractors out of the public sector, create huge problems around employment rights and prevent the delivery of vital public services,” IPSE said.
The Recruitment Employment Confederation (REC) said public sector employers do not support the changes, with employers concerned that the reform will “inhibit their ability to attract the talented individuals they need to effectively run local authorities and NHS trusts".
An REC survey of 95 public sector HR managers found that 66 expressed “fears that the government’s changes would have a negative impact on councils, hospitals and schools, by increasing their wage bill or damaging their ability to attract and afford the senior contractors and interims they need to manage local public services”.
REC chief executive Kevin Green said the government was creating “unnecessary barriers for beleaguered HR teams who need to bring in fresh talent and smart thinking during these difficult times for public spending".
"Real-time and definitive"
The Association of Chartered Certified Accountants (ACCA) meanwhile warned that the reforms will “disproportionately affect a sector whose continued flexibility and profitability will be an essential foundation for the future economic security of the country”.
The public sector’s likely response to the imposition of financial risk and increased administrative burden is the most fundamental issue arising from the proposal, ACCA said, with the body highlighting a “significant risk” that public sector bodies would seek to distance themselves from the risk of liability by engaging only large, publicly listed outsourcing service providers.
ACCA said HMRC will need to ensure that public sector bodies receive sufficient guidance to enable them to comply: “It is debatable whether parish councils for example will be aware of their new obligation and of how to properly undertake the IR35 assessment unless HMRC take steps to publicise the changes.”
The organisation also raised concerns about a proposed new employment status tool developed by HMRC.
A test based on the proportion of a contract’s value that relates to consumables has “no basis in the intermediaries’ legislation or wider employment status law”, it said.
The ICAEW Tax Faculty said it was not convinced that the tool would be sufficiently accurate to “negotiate the complexities” of the distinction between employment and self-employment.
"It is difficult to see how a simple online tool will direct users to the correct conclusion" – The Association of Taxation Technicians
The Association of Taxation Technicians added: “Given that [IR35] rules were introduced sixteen years ago [and] there remains significant uncertainty as to when and how they apply, it is difficult to see how a simple online tool will direct users to the correct conclusion.”
But HMRC insisted that the tool will provide “a real-time and definitive” HMRC view on whether or not the rules apply to a particular engagement.
“Around 10%” of people who should pay tax on at least part of their personal service company’s income under IR35 currently do so, an HMRC spokesman said. “This is both unfair to those who pay the correct taxes and hugely expensive for the Exchequer.”
Update: An earlier version of this article contained an error – introduced at the sub-editing stage – on the wording of IR35. Apologies for the oversight – Matt Foster, deputy editor