Untangling how NHS Digital got IR35 status wrong to the tune of £4.3m

It is hard for us to see the actions of NHS Digital, which has created an accrual of £4.3million for miscategorising contractors’ IR35 status, as through anything but the prism of market forces.

Viewing it through such a lens provides both useful insights into the health service digital unit’s activities related to April 2017’s off-payroll rules, and foreshadows what we think might happen in light of April 2020’s off-payroll rules, writes Dr Iain-Campbell, general-secretary of the Independent Health Professionals Association.

First, some important background. Our association’s legal action against NHS Improvement which culminated in us co-authoring NHSI guidance stating (in May 2017) that individual assessments were a requirement, theoretically gave NHS trusts the nod to cease ‘blanket’ IR35 status determinations and begin conducting fair assessments. But following our victory, NHS Improvement and HMRC hastily arranged a webinar attended by most NHS trusts in which HMRC’s IR35 lead once again sanctioned (role-based) blanket assessments.

While this move essentially resulted in NHS trusts failing to conduct IR35 assessments with ‘reasonable care,’ things appear to have gone a bit differently at NHS Digital. The reason? In a word? Competition.

Consider that for most health sector workers, the size of the private market in the UK is extremely small. Consequently, the fact that such engagements were still subject to the old IR35 rules (Chapter 8), presented little impediment to ‘blanketing’ as there simply were far too few jobs for this to cause a mass exodus to the private sector. In NHS Digital though the story was different. This is because, in IT, the number of private sector jobs, unaffected by the reforms was very significant. This meant that in attempting to source contractors, NHS Digital would face extreme difficulty if it attempted to rule them all inside IR35  -- rates would either need to be massively inflated to compete, or workers would simply migrate to private sector jobs.

So it appears that a combination of new HMRC guidance on IR35 and market forces not conducive to blanketing, has encouraged NHS Digital to break ranks with other public sector bodies. This has, quite unsurprisingly, given the relentless zeal with which HMRC has been pursuing the self-employed, and apparently brought NHS Digital into a protracted dispute with HMRC.

This sort of IR35 status ‘squaring-off’ between the two public sector giants appears to have persisted until recently, when NHS Digital’s accounts were publicised, bearing the appearance of it having partially thrown in the towel. Indeed, the £4.3m accrual is presented as conceding to HMRC and its position. Yet this capitulation (-- a fair description given NHS Digital is ultimately going along with what HMRC have told it), has seemingly occurred without HMRC taking NHS Digital to court over the matter. The NHS Digital accounts in question speak only of “extensive discussions” between the two; nothing more.

The key to why this unprecedented series of events has occurred is probably the context. The consensus is that the public sector IR35 reforms will be expanded from April to cover most of the health sector’s commercial posts. Given NHS Digital’s somewhat unusual position of actually conducting assessments in the public sector was a stand it was forced into (due to the practical problem of worker exodus to the private sector), the anticipated end of this market force driving workers out when the reforms are extended would make NHS Digital far more likely to toe the public sector line.

Within this context, NHS Digital’s sudden decision to throw the towel in and cease resisting HMRC is more understandable. Indeed, it is entirely possible that this move may be designed to send a signal to the private sector. It’s being suggested that NHS Digital has little need to maintain its opposition to the general public sector stance – the intent may now be to sew fear in private sector clients’ minds by staging a high profile capitulation to HMRC. Additionally, NHS Digital is likely to watch how private sector organisations behave and, if they follow the lead of many of the banks, we are likely to see NHS Digital hardening its stance yet further.

As regards the status decisions NHS Digital has taken, while individual assessments are a requirement, their decision to initially screen with CEST will cause significant injustice. This is because the highly criticised CEST tool is skewed against the contractor and not only misses out key caselaw tests on the basis of flawed reasoning – it is also a mechanistic approach of a type which the courts have frequently warned against throughout - for examples see Mummery J in Lorimer v Hall, a passage cited frequently in recent cases. All assessments should be conducted with ‘reasonable care’ with individual specialist advice from a tax specialist. Those denied this by CEST are being dealt an injustice.