HMRC’s analysis of the success of public sector IR35 changes


At the back-end of last week, the government launched a consultation into off-payroll working (IR35) in the private sector. At the same time, it also released an accompanying research paper, Research Report 487, which looked at the immediate effects of the IR35 reforms in the public sector. The research was then used to “inform opinions” in the consultation, in which HMRC said that rolling out the changes in the private sector is their “lead option”.

If the lead option is to replicate the changes into the private sector, the public sector implementation must have been a roaring success, right? Wrong. We’ve seen the NHS apply blanket decisions and then u-turn on them, we’ve seen contractors walk out of the MoD and the NHS, and we’ve seen confusion and worry from contractors and clients who disagreed over their IR35 status.

The Independent Healthcare Professionals Association warned that that ongoing staff shortages will cause a decline in patient safety as 98 per cent of their members said they would consider leaving the NHS in response to the changes. Just last month, accountancy body ICAEW wrote to the Treasury that HMRC’s assessment tool (CEST) was “not suitable for use in the private sector. HMRC has stated that CEST does not cover all scenarios, including the mutuality of obligations master and servant test, and that the tool was designed based on public sector contracts.”

Meanwhile, a survey from the Freelancer Contractor Services Association (FCSA) found that 50 per cent of respondents had not carried out an IR35 compliance test and 42 per cent were automatically inside IR35 without any form of assessment. In total, only 24 per cent said that they had carried out individual assessments.

And yet this is still the “lead option” in the consultation for the private sector. So, surely there must have been some encouraging research that led to this proposal? Well, yes and no. HMRC appear to have “cherry-picked” from the summary of the report and ignored the more inconvenient truths the research reveals. Here are some of the high-level figures showing the impact of the changes in the public sector:

  • 32 per cent of public sector bodies said that it was now more difficult to fill contract vacancies (figure 6.1). 24 per cent of central bodies said that since the reforms were introduced in April 2017 they have found it harder to recruit off-payroll contractors with the right skills or experience (section 6.4).
  • 33 per cent of public sector bodies said that contractors were less willing to carry out work for them since the reforms were introduced (section 6.4).
  • 28 per cent of public sector bodies said that since the reforms were introduced, contractor rates had increased (figure 7.1). One interviewee said that they had “been working our socks off to drive down these costs and pretty much as a consequence of IR35…we’ve noticed a trend that everything has shifted up [in cost by] 10 -15 per cent.” (section 7.6)
  • 5 per cent of public sector bodies determined that contracts fell inside IR35 without any assessment (section 8.18). This contrasts with the FCSA research which showed significantly higher figures.
  • 38 per cent of public bodies used HMRC’s CEST / ESS tool as a source of information for making IR35 determinations (figure 8.4). Of these, 22 per cent said that the tool was either “not very helpful” or “not at all helpful”, highlighting the inadequacies of the tool (figure 8.5).
  • 46 per cent of public bodies said that they had had disputes over status with contractors. The vast majority of these (62%) were because the public body had ruled that the contractor was inside IR35 (section 8.32). Organisations reported that the process was time consuming and costly, one noting “A lot of extra work…40 per cent extra on my work.” Whilst a case study mentions how they will be creating a full-time post to handle complaints and check assessments as they expect the disputes to continue.
  • 60 per cent of central bodies reported that their staff spend more time on administration since the reforms (section 8.36)

In summary…

Looking at the research commissioned by HMRC, it is hard to believe that it considered the entire report when setting extending the changes to IR35 as its “lead option”. The report highlights that the public sector now faces greater difficulty recruiting, having to pay more to recruit, and having to spend more time and effort understanding and implementing the rules. This is delaying projects and adding increased costs to the public sector at a time when they are looking to save money.

And yet the lead option is to inflict the same damage on the rest of the flexible economy.

Matt Searle is a director at IPSE and an experienced IT contractor. 

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