Contractors are being forced out of the public sector as a result of poor guidance to government departments. The inaccurate and unhelpful advice given by HM Treasury and HMRC on how public sector clients should implement the off-payroll rules is, a year after the new regime was imposed, having a damaging effect.
ContractorCalculator has obtained evidence from contractors currently and formerly working on public sector contracts that the rules are being applied inconsistently across different departments, with highly variable and generally negative results.
“Public service delivery is at risk and an urgent review of the guidance by the Cabinet Office is required,” says ContractorCalculator CEO Dave Chaplin. “There is no doubt that the public sector is now losing valuable contractors directly because the off-payroll rules are being incorrectly and inconsistently applied. Contractor numbers in key departments affected have fallen by 12% over the first seven months that the rules have been in force.
“Our evidence shows the Cabinet Office and HMRC playing ‘ping-pong’ with requests for clarification and advice on how to apply the rules. Some departments have created their own IR53 compliance tests out of desperation, costing the taxpayer dearly and causing some contractors to feel they have to leave.”
Poor guidance results in multiple tests for ‘assurances’ on tax
The guidance for government departments on how to implement the off-payroll rules, which was leaked to PCG in July 2012, specifies that assurances should be obtained for those off-payroll workers earning over £219 per day or on assignments lasting more than six months.
But the detail on how those assurances that off-payroll contractors are paying the correct amount of tax should be supplied is poor. Requests for clarification to the Cabinet Office are referred to HMRC, and subsequent requests to HMRC are referred back to the Cabinet Office, leaving departments in the dark and contractors uncertain about their futures.
There is no doubt that the public sector is now losing valuable contractors directly because the off-payroll rules are being incorrectly and inconsistently applied
Dave Chaplin, ContractorCalculator
“We understand that HMRC is behind the guidance and has retained a level of ambiguity to ensure that both departments and off-payroll workers ‘over-comply’ because they are scared of breaching the rules,” continues Chaplin.
“If the rules were clear and easy to follow, then it would become clear that the vast majority of off-payroll workers are genuine contractors who are already paying the amount of tax that they should under the law. But this does not feature in the government’s or HMRC’s game plans in the quest for soundbites that give the impression of taking a tough stance.”
Departments have developed their own IR35 compliance tests, at great cost
The lack of firm guidance beyond using HMRC’s business entity tests, which have no legislative foundation, IR35 or its online employment status indicator has led to some departments developing what are effectively unique IR35 compliance solutions.
Chaplin explains: “The Ministry of Justice (MoJ) is a case in point. At a PCG-led off-payroll briefing for MoJ contractors, it became clear that IT contractor resources were diverted into building a mini-IR35 review specifically for determining whether the MoJ’s contractors were caught by IR35.
“Even after the IR35 review solution was introduced by the MoJ, contractors are saying that the department is still not satisfied. So, even after investing in a bespoke solution, the uncertainty has not been removed.
“We have been provided with similar examples from other departments where contractors have been spending billable hours charged to the taxpayer determining whether the off-payroll rules apply, even though they should be focusing on project work. Surely the objective of the off-payroll rules was to generate more tax income, not consume it?”
The impact has been to reduce vital ‘off-payroll appointee’ numbers
All government departs are required to report on contractor numbers, or ‘off-payroll appointees’ (OPAs) in their annual reports. An analysis of the 16 published so far, out of 20 departments, shows that contractor numbers have fallen by 12% since the rules came into force and 31 March 2013.
“Without further data and analysis, we can’t prove a direct correlation between the introduction of the new rules and the fall in contractor numbers,” admits Chaplin. “However, authoritative labour market reports show contractor demand is increasing in both the private and public sectors.
“Furthermore, strong qualitative evidence shows the public sector is turning to contractors both for their expert skills and to maintain service delivery, while permanent headcounts are being cut. With this evidence, I’d call that 12% fall a definite smoking gun.”
Chaplin concludes: “Rather than continue to operate in an atmosphere of uncertainty and suspicion, many contractors have left the public sector and many more are likely to follow. An urgent review of the guidance for government departments is required before too much more money is wasted and damage is done to public service delivery.”