IR35, or the ‘off-payroll rules’, was introduced to the public sector in April 2017 and has since been heavily criticised for it’s unclear, constantly shifting definition of what is it to be ‘inside’ or ‘outside’.
The public sector has seen a dramatic decline in contractors since, arguably because of the introduction of this legislation.
So what does IR35 mean for you as a public sector contractor?
How was IR35 introduced to the public sector?
Back in 2012, rules were introduced that affected contractors who provided services to the public sector through their limited companies.
The rules dictated that if the contract with the end client was equal to or longer than six months, and the day rate was equal to or greater than £200, the contractor had 20 days from the issue or renewal of the contract to present evidence of their IR35 status. It was warned that a failure to present the evidence could lead to the contract being terminated and details passed on to HMRC.
However, in the 2016 Autumn Statement, the Chancellor confirmed that the Public Sector was to undergo a massive revamp in 2017.
From the 6th April 2017, ‘off-payroll’ rules meant that the IR35 status of a contractor was no longer determined by themselves, but by the public sector organisation – or end client, in other words.
Why was IR35 received so badly in the public sector?
The public sector organisation was not only to make the IR35 determination for the contractor, but to be liable if deemed to have made the wrong decision. Determinations were made with HMRC’s much-scorned CEST tool for each contract.
Of course, public sector organisations were worried about giving wrong IR35 determinations and having to pay a penalty. This lead to blanket determinations for thousands of contractors, who were advised that they were now inside IR35 and that going forward, they were to be taxed at source, i.e. they had to pay the same tax and National Insurance Contributions ‘NICs’ as an employee.
General outcry arose from the thousands of public sector contractors who were suddenly found to be non-compliant after years of being inside IR35 – something BBC chiefs spoke out about last month - and would have to pay employee taxes.
The fact that their employment status would not change, meaning they were unable to receive employee rights like sick, maternity, and holiday pay or protection from unfair dismissal, fanned the flames. Many left contracting altogether in favour of permanent jobs while others took a stand and began campaigning against the legislation.
What qualifies as a public sector contractor?
The public sector broadly encompasses any government body such as a local council, the NHS, Ministry of Defence, the BBC, higher education institutes and fire services.
For the purposes of the off-payroll rules, the definition is set out in the Freedom of Information Act 2000 and the Freedom of Information (Scotland) Act 2002, which means that the public sector organisation has to legally respond to freedom of information requests, and includes:
- Government departments and their executive agencies
- Companies owned or controlled by the public sector
- Schools and universities
- Local authorities
- The National Health Service (NHS)
The rules also apply to contractors who provide services through their own intermediary to the UK Parliament, the National Assembly for Wales Commission, and the Northern Ireland Assembly Commission. As always though, there are exceptions.
Some public sector organisations that provide medical services are treated differently. Hospitals, GP surgeries and dental practices that provide NHS medical and dental services must consider if the off-payroll rules apply to all contractors working for them through an intermediary. This includes contractors who are providing ophthalmic and pharmaceutical services to the NHS.
Retail businesses providing ophthalmic and pharmaceutical services for the NHS – for example, high street pharmacies or opticians - do not need to check if the off-payroll working rules apply.
Furthermore, not all Government organisations fall under the Freedom of Information act(s). Bodies such as GCHQ, for example, are exempt from this due to the sensitive nature of their work.
What are the lasting effects of IR35 in the public sector?
The decimation of public sector contracting is perhaps most tellingly demonstrated in the lack of locum doctors, surgeons and nurses now in the UK. ONS data shows that the number of self-employed doctors has plummeted by 20,000 and that we have 11,000 fewer doctors working for the NHS in general following the blanket determinations. International talent isn’t willing to travel for less take-home pay, leaving gaping holes in NHS resources that are not easy to fill.
Ultimately, hindsight shows that not only were the rules and online tool rushed, but the whole 2017 IR35 revamp was poorly thought through.
Whilst the underlying IR35 rules did not change, confidence in HMRC and the Government plummeted to new depths as a result, and left all contractors, freelancers and consultants feeling insecure and targeted.
Those feelings still persist in public sector contracting today.