NHS in IR35 status U-turn

The NHS has quietly performed an across the board U-turn on the IR35 status of its Personal Service Company contractors.

In a memo obtained by ContractorUK, the health service regulator finally admits that the NHS’s “previous position” that all PSCs are universally caught by IR35 was “not accurate.”  

Experts and even HMRC had strongly suggested in recent weeks that NHS Improvement was incorrectly applying the rule, which health officials now agree should be applied on a “case-by-case basis.”   

But the realisation comes too late for many PSCs, locums and agency staff who have quit the NHS because of its mistaken belief that PAYE and NIC must be automatically taken off their pay.

‘Legal threat’

NHS Improvement yesterday declined to say how many workers it has lost due to its misapplication of IR35, as did a London hospital which lost upwards of 30 contractors.

However, the NHS’s initial stance (that all non-employees were inside IR35) triggered a legal threat by two health worker unions, whose members reportedly stood to lose up to 50% of their incomes.

From now on, NHS providers must “correctly assess the worker contract” and the worker’s “individual circumstances” in a “fact-specific way,” the regulator says in its memo.

Shaun Critchley, boss of contractor services firm ADVANCE, thinks that’s too big of an ask, given that the NHS is cash-strapped, resource-poor and now, umbrella-savvy.

“With NHS budgets under pressure…how can an NHS trust be expected to find the time for careful case-by-case scrutiny of every contractor’s IR35 status?” he asked.  

“Many PSCs, agencies and NHS trusts have already moved towards umbrella models -- particularly those that enable the contractor to be reimbursed for T&S expenses when Supervision, Direction or Control does not apply.”

‘Stick with umbrellas’

So he predicts that “most” NHS bodies and agencies will “stick with umbrellas” due to the “time, complexity, headaches and risks involved” in assessing for IR35 individually.

NHS Improvement knows what Critchley, a qualified solicitor, is referring to -- it talks of the “substantial administrative implications” that testing each and every PSC for IR35 entails.

But “failure to comply with the updated legislation…and correctly assess the worker”, warns the regulator's memo, “could result in providers being liable to pay the equivalent PAYE deductions”.

This threat will likely be enough to incentivise NHS providers to comply, according to IR35 advisory Qdos Contractor.

“The final IR35 legislation clearly states that ‘reasonable care’ had to be taken when making decisions over the IR35 status of public sector contractors.

“Put simply, this means that public sector employers and agencies should not make blanket determinations.”

‘Tarred with the same brush’

Chief executive Seb Maley added: “Going forward, assessing contractors on a ‘case-by-case’ basis will prevent them all being unfairly tarred with the same brush, and will only go to benefit the NHS, and hopefully set a marker down for every public sector organisation.”

Another firm that specialises in IR35 status, Abbey Tax, agrees that the U-turn by the NHS won’t go unnoticed by other taxpayer-funded bodies. But mainly because of practical concerns.

“This was a strategy [blanket assessing all PSCs as inside IR35] which always risked losing valuable contractor resources,” said the firm’s status specialist Rebecca Walker.

“[It] was always going to have to be reconsidered, especially if it looked like project timetables were not going to be met or necessary work could not be completed.”

‘Tax take’

She believes that the updated IR35 framework (the off-payroll rules) may end up being “revenue-neutral,” particularly if trusts heed NHS Improvement’s advice in its memo of commissioning “independent tax advice” to resolve status issues where the ESS cannot.

Walker said: “The tax-take will rise as more engagements are in many cases, no doubt, correctly deemed caught by IR35; but if NHS trusts and other bodies have to compensate by paying higher fees, the spend on external resources could well compensate for this.”

Her alert about the exchequer might warm officials to a recommendation being urgently tabled by the Association of Independent Professionals and the Self-Employed (IPSE).

“We are calling on the next government to conduct six-monthly reviews to monitor the impact of this legislation,” IPSE’s Andy Chamberlain said yesterday, referring to the off-payroll rules.

“At the moment, it seems to have done nothing but heap more burden on public sector organisations and drive expert contractors out of the public sector altogether.”

‘Flawed’

Describing the April 6th legislation as “flawed”, the association said it welcomed the NHS’s change of heart over the status of its off-payroll workers.

But IPSE also suggested the U-turn was inevitable, saying: "Public sector bodies are obliged to take reasonable care when making their IR35 assessments.

"Clearly the initial blanket approach by NHS Improvement to apply IR35 to all its engagements, regardless of the working practices, failed to meet this obligation.”

However, a spokesperson for NHS Improvement was unapologetic: “We have published updated guidance on the IR35 rules, which amends our previous guidance to trusts and ensures that there is no ambiguity in what trusts are expected to do.”

‘Ambiguity’

The spokesperson added: “Trusts should not assume that all agency staff will fall inside IR35; they need to assess whether or not the IR35 rules apply on a case-by-case basis.

“Our updated guidance encourages trusts to seek expert advice or approach HMRC in cases of ambiguity. We hope this will contribute towards trusts taking steps to ensure that agency staff pay the right amount of tax and the same amount as NHS staff doing exactly the same job.”

Editor's Update: The London hospital referred to in this article, Guy's and St Thomas', emailed us a statement:

“We welcome NHS Improvement’s recent advice to Trusts about changes to the IR35 rules. This advice is consistent with the approach Guy’s and St Thomas’ has adopted, and the introduction of the new rules has not prevented the Trust from attracting staff to fill short or long term temporary roles. Where the new rules have encouraged staff onto our payroll, this has helped reduce costs while providing a range of positive benefits to those making the switch.”