Over a year after the off-payroll rules were introduced, ContractorCalculator has obtained evidence that the costs to the taxpayer are spiralling – both for implementing of the rules, and for replacement of contractors who have been terminated or forced to leave.
So bad has the situation become that ContractorCalculator CEO Dave Chaplin is calling for urgent action: “To prevent the taxpayer shelling out even more money to ‘solve’ something that was never really a problem, an urgent review of the off-payroll rules and their guidance is required.
“While this review is happening, the rules should be suspended so no more resources are expended on what has clearly backfired into becoming an expensive exercise damaging the prospects of our flexible workforce and the long-term quality of our public services.”
Off-payroll rules have clearly failed to meet their objectives
“The original objective of the off-payroll rules was to increase the tax yield by taxing off-payroll workers who should really be employed like employees,” says Chaplin. “However, the evidence suggests that exactly the opposite has occurred and the whole off-payroll fiasco has cost the government money, rather than generating revenue.”
ContractorCalculator’s evidence reveals that contractors have been asked to engage in or design costly off-payroll implementation processes. And some departments have fired contractors wholesale and brought in outsourced IT services replacements.
These replacements are using non-European Union (EU) workers on intercompany transfers (ICTs), who are making what Chaplin calls “questionable” tax contributions and flouting Border Agency guidelines.
Costly implementation processes
Taxpayers are funding the implementation of expensive and unnecessary processes and procedures by central government departments. Some departments, such as the Ministry of Justice (MoJ), have gone as far to build their own IR35 assessment software, also at the taxpayer’s expense.
Chaplin explains: “From what contractors currently on public sector contracts, or who have recently left or been forced out, are telling us the MoJ example is far from isolated. The man-hours required to implement the rules since their introduction in September 2012 are just insane.”
According to some contractors speaking to ContractorCalculator, who asked to remain anonymous as they were still working within the public sector, the spiralling costs have largely been as a result of poor guidance from HMRC on how the rules should be implemented.
HMRC’s vague guidance is at the root of high costs to the taxpayer
“HMRC, which is behind the guidance for departments on how to implement the off-payroll rules, has resorted to its age-old tactic of keeping the guidelines deliberately vague. It knows that those subject to new rules tend to overcompensate,” notes Chaplin.
HMRC, which is behind the guidance for departments on how to implement the off-payroll rules, has resorted to its age-old tactic of keeping the guidelines deliberately vague. It knows that those subject to new rules tend to overcompensate
Dave Chaplin, ContractorCalculator
The reaction of some departments to contractors has been brutal. It seems that one in three contractors have been told to implement the business entity tests, another third were asked to secure an independent contract review, and a quarter have to provide a deemed payment calculation as part of providing assurance that their tax affairs were in order.
“We’ve also been told that most contractors were given less than a month to comply with the new rules. And about a third were only given a fortnight to comply with their public sector client’s ‘request for assurance’. The result was a whole load of implementation work completed during ‘billable hours’ time. And guess who gets to foot the bill? The taxpayer, of course.”
Contractors have also been asked by their public sector clients to apply different solutions, such as using HMRC’s contract services, going on the payroll and taking their fee as salary or operating under an umbrella company structure.
The impact of ‘knee-jerk’ implementation
According to Chaplin, more than three in five contractors have been directly affected by the off-payroll rules since September 2012: “Contractors have been reporting a very messy situation exists within central government departments.
“Some contractors have refused to comply with their clients request to provide assurance that their tax affairs are in order. Although only a very small number have been fired as a result, ten times that number – about a third of those we’ve spoken to – felt they had to leave anyway.”
Most worrying of all, notes Chaplin, is that contractors are being forced into IR35 when it does not apply: “We’ve heard from six contractors in this situation. The alternative was to face termination.”
Non-EU workers with questionable tax status
Alongside the costs and impacts of implementation, contractors are being directly replaced with non-EU workers brought into the UK under intercompany transfers (ICTs) and who are most likely paying even less tax than the limited company contractors they replace.
“We have already published the shocking evidence revealing that the Student Loans Company (SLC) terminated its contractors in favour of an IT services provider that supplied at least two non-EU ICT workers,” says Chaplin.
An analysis of an ICT IT worker on a nominal gross salary of £46,000 shows that the exchequer may be worse off to the tune of over £14,000 in lost tax revenue compared to hiring a contractor on the equivalent rate.
“The official line is that whole point of this off-payroll exercise is to generate more tax,” says Chaplin. “That’s just so clearly not happening, and makes a mockery of the rules.