Contractor sector assesses Osborne's damage

Consultancies and outsourcing firms will be dragged into the clampdown on public sector PSC contracting, vowed yesterday by George Osborne at Budget 2016.

In fact, either type of business supplying PSCs to the public sector faces being saddled with the IR35 decision and liability, HMRC told a status advisory following Mr Osborne’s speech.

“HMRC confirmed the IR35 Forum will be consulted on how to best implement the reform…which [will catch] not just agencies but also consultants and outsourcers,” said the advisory Bauer & Cottrell.

The Treasury was also speaking yesterday -- specifically to those parties who responded to the IR35 discussion document which Mr Osborne’s move against PSCs is being presented as a response to.

Officials told one contributor: “Thank you for your engagement with the discussion document we published last Summer on how to improve the effectiveness of the current [IR35] rules. 

“As you may have seen, the government announced at the Budget [on March 16^th 2016] that it will reform the intermediaries legislation for public sector engagements.”

The officials then summed up the clampdown: “Liability to pay the correct employment taxes will move from the worker’s own company to the public sector body or agency or third party paying that company.”

Both interventions (HMT’s and HMRC’s) seek to clarify -- the IR35 discussion document has now been responded to, and ‘third parties’ will include consultancies and outsourcers

But the industry is still unclear. Responses last night ranged from ‘it’s the end of public sector PSC contracting;’ ‘it’s a prelude to hit all PSCs;’ ‘it will hurt the NHS,’ ‘it means no change’ and ‘it’s a reprieve.’

The latter is the belief of ICS’s John Lyon, who said: “The tens of thousands of contractors who work with government departments through PSCs today received a reprieve until 2017.”

Sam Hurley at staffing body APSCo agrees: “The only light is that the proposal is not due to take effect until 2017 and HMRC has announced that it will enter into a consultation process”.

She believes that during that process, HMRC will learn that “few, if any, recruitment firms” will be willing to take on the type of liability that the Budget proposes (at chapter 2.40).

In particular, where recruiters provide PSCs to state bodies, they will have to assess PSCs’ IR35 status for tax purposes and consequently, are liable for any due tax payments.

“This is clearly unjust, because determining someone’s tax liability is highly complex,” said APSCo, the Association of Professional Staffing Companies.

“Recruiters simply do not have sight of the reality of the working relationship. It is, therefore, entirely unreasonable to expect them to make this decision, and be financially liable for it.”

Similar to IPSE -- the UK’s contracting trade group, APSCo says it will be fighting the proposal. And also like IPSE, the association says public services will suffer if it goes ahead.

Hurley warned: “[It] will stop the vast majority of PSCs from providing services to the public sector, significantly impacting its ability to access the specialist skills it so badly needs.”

Chris Bryce, IPSE’s chief executive echoed: “[This new IR35 duty on public engagers] will endanger the delivery of vital public services and important projects like HS2.”

The reasoning why the likes of the NHS could suffer from making public bodies, or those paying the bodies’ PSCs, liable and accountable for PSCs’ IR35 positions, is plain to an accountancy firm.

“[There is] a question of whether the era of working via a limited company for the public sector will soon end, as we cannot see working for the public sector remaining attractive.

“However, we also cannot see the [proposed] system lasting because were contractors to stop working within the public sector, the result would be a huge talent gap,” said DNS Associates.

The only way the proposal may work, in practice, is with full consultation, a HMRC in ‘listening mode’ and then a “phased in” start before 2017, recommended DNS’s founder Sumit Agarwal.

But even then, PSC contractors and their engagers will be part of a system that looks rigged against them, much in the same way that BETs tested for factors unrelated to IR35.  

“The current HMRC ESI tool is biased towards HMRC’s interpretation of case law,” Cottrell explains. “The example of a contractor where the rules would not apply (Tanya, page 7) illustrates an extreme situation.

“She has tendered for the work and has numerous clients… [it’s an] engagement that doesn’t fit with a typical public sector contractor; it shows a lack of application of correct case law principles for IR35 cases.”  

Hurley, who like Cottrell was called by the PSC Committee as an expert witness on IR35, is dumbfounded. “I find it hard to believe they’ve properly assessed the effects,” she said. 

Some advisers to PSC contractors and their clients appear more relaxed.

“The 2016 Budget did not contain anything that is likely to change the life of the contractor much for now,” says Tim Stovold, head of tax at Kingston Smith.

Although he acknowledges that PSCs facing the public sector are a possible exception to his ‘no change’ verdict, he hinted at ‘business as usual’ for their private sector counterparts.

“There is no suggestion yet that this approach [of shifting IR35 liability from worker to engager] is going to be extended to the private sector,” Stovold said.

Nevertheless, the accountant cautioned that “it is possible that in the future, contractors may find that their clients want to withhold PAYE and NICs from payments.”

IPSE’s Mr Bryce is alert to any scope creep by the taxman. “We have been told by HMRC that these new rules will not apply to the private sector. The government must keep its word on this and we would firmly oppose any future change to this position,” he said.