MoD agency told IT contractors to join PAYE or leave

Documents from a Ministry of Defence agency warning limited company IT contractors of outright termination if they refuse to be taxed like employees have been obtained by ContractorUK.

Spanning some three pages, the documents from the UK Hydrographic Office (UKHO) suggest that the MoD is pre-empting April’s IR35 changes for contractors who use PSCs at public bodies.  

From then onwards, a set of tests with the effect of payrolling many such contractors will have to be run on all PSCs by ‘the paying agent’ -- so recruiters, or end-users like the MoD.

Currently however, and under government guidelines to ensure PSC contractors pay the appropriate amount of tax, public end-users should be prepared to accept a contract review.

But “a change to MoD policy means that a contract review is no longer deemed sufficient evidence of compliance”, reveals the documents, which are signed by the UKHO’s chief financial officer Andrew Millard.

“This is rubbish,” scoffed one affected IT contractor. “[That]’s about the most polite comment I can think of… [about the UKHO’s] letter to all its contractors [which clearly is] with regard to the proposed public sector legislation.”  

The contractor, who has since quit the UKHO along with a reported 29 other contractors, said becoming jobless was preferable to coming to the attention of HMRC, which he fears he would have done if he suddenly joined the payroll. In the end, the contractor was only pointed in the direction of HMRC.

The documents (issued with a September 1^st 2016 deadline for acceptance to operate PAYE), state: “Where we do not receive satisfactory assurance of compliance with tax legislation, we are obliged to terminate the contracts of those off-payroll appointees involved and refer them to HM Revenue & Customs.”

And the threats from the UKHO weren’t made in the documents alone. “The way it was handled…was very poor and consisted of many threats to report all the contractors [to HMRC],” the affected contractor said.

“That’s even though we had previously shown ourselves to be operating outside of IR35 with contract and working practice reviews.”

Approached by ContractorUK for a related comment albeit before the documents were released, HMRC confirmed: “Many public sector bodies are already required to check that some off-payroll workers are paying the correct employment taxes”.

A HMRC spokesman also said: “Public sector bodies have a responsibility to taxpayers to ensure that the people working for them are paying the right tax, so from April 2017, where workers are engaged through their own limited company, responsibility to operate the off-payroll working rules and liability for paying associated employment taxes will fall to the public sector body, agency, or other third party paying the worker’s company.”

A source who was formerly IT contracting at the UKHO reflected: “My fear is that this move [by HMRC] is the thin end of the wedge and after a year or two these rules will be introduced to the private sector”.

But referring to the MoD agency where he worked, the source said that based on what senior managers had told him at the time, the UKHO’s move was designed to “cull” its PSC contractors -- primarily “to reduce costs.”

It therefore remains to be seen whether other public sector departments will follow the UKHO’s example and insist that PSCs join the payroll or become jobless, ahead of tests to determine the former, but such tests will not result in employment rights.

“I don’t understand how as a contractor I can be taxed as if I were a salaried employee and yet receive none of the benefits,” the affected contractor said. “How is this fair or morally ok?”

The ex-UKHO contractor is still a PSC but now works in the private sector -- a response to the tax status shake-up in the public sector that many commentators foresee will become ‘the norm’ post-April.  

Editor’s Note: Related Reading –

Contractors’ Questions: How to prepare for April’s IR35 changes?

HMRC puts its public sector IR35 proposals to private hirers

Contractors’ Questions: What will public PSCs do about IR35 from April?

Now, HMRC admits its new IR35 fix is no silver bullet

Contractors’ Questions: Will being inside IR35 trump using a brolly?