New public sector IR35 study from HMRC maximises research base, minimises impacts

HMRC has unveiled the “long-term effects” of IR35 reform in the public sector -- a study that comparatively maximises the research base, but minimises the reform’s impacts.

Hinting on page five of 79 that HMRC knows its 2021 off-payroll research was deemed “wholly inadequate,” IFF Research says this new study covers a sprawling-sounding 2,653 sites.

So contrasting the March 2021 research, which the HMRC-commissioned firm calls “robust” despite acknowledging it applied “only” to Education, the new study does not discriminate.

In fact, the 2,650 sites comprise single sites which run IR35 compliance just for their site, on top of central bodies and public authorities which do it for numerous taxpayer-funded bodies.

'Difficult'

Outwardly awkward for HMRC (given it spent months educating end-users on the rules), half the sites said they did not use any detail -- from HMRC or elsewhere -- to comply with IR35.

At central bodies, more than half (53%) said they found compliance with the April 2017 off-payroll rules “difficult,” and one in three found it more difficult to fill contractor vacancies.

Two central government bodies featured in the study describe IR35 reform in the public sector as a “significant burden” that required “substantial changes to their administration”.

'No change'

And potentially relating to those changes, 37% of sites and 50% of central bodies had to make their PSCs full-time employees, “to avoid having to consider” adhering to the rules.

But then, as it does often in the study, IFF Research steps in after pointing out a perceived negative of the rules to say -- about payrolling PSCs for example -- that the volume or impact was small.

Similarly counter-balancing possible negatives, most sites and central bodies found “no change” in filling contractor posts; 49% of bodies had no PSCs inside IR35, and 72% haven’t changed their intake of outside IR35 workers.

'It downplays things'

“This study suggests the impact of IR35 reform in the public sector was minimal, despite there being plenty of evidence out there to contradict this,” says Qdos CEO Seb Maley.

He reiterated: “It downplays things. Even going as far to say that nearly half of public sector bodies have not assessed any contractors inside IR35 whatsoever.”

Julia Kermode, of independent work champion IWORK agrees that minimising seems to be the goal.

'Unbelievable nonsense'

“‘Downplaying things’ is an understatement. [According to the report, most outfits in] the public sector didn’t experience any difficulties in filling contractor roles.”

Ms Kermode added: “This directly contradicts all the many, many reports at the time. [Compared to those ‘on the ground’ reports, these findings are] complete and utter unbelievable nonsense.”

Kate Cottrell, of IR35 advisory Bauer & Cottrell says contractors may be more concerned with what the ‘nothing to see here’ characterisation of IR35 reform impacts will be used for.

'Pleasing, concerning, justifying'

“It’s pleasing this is far more comprehensive than the previous ‘research.’ It’s 79 pages. But however you read it, there is a lot of those interviewed who did not find IR35 easy.

“More concerning is that as the ‘soft landing’ nears its end, the report will likely be cited by HMRC/HMT as being 100% supportive of reform,” Ms Cottrell told ContractorUK, adding:

“It will be used to justify HMRC compliance investigations, justify [penalties for] getting CEST wrong, and justify potentially hefty tax/NIC bills and fines facing the private sector.”

'Unhappy readers will include MoJ, Defra'

A former tax inspector, Ms Cottrell also said that while HMRC would likely be “happy” with how their researcher’s report has turned out, the public sector’s big penalty recipients won’t.

“Among the unhappy readers of this report will be all those public sector bodies fined millions of pound for getting IR35 wrong,” she said, referring to the MoJ, Defra and others.

“I wonder if [IFF Research] interviewed any of those? Would they agree that CEST is great [given 24% of respondents who sought information said CEST was the most helpful source]?

“And would those fined millions for getting it wrong also agree IR35 reform made little difference to anything and it was all easy peasey? I very much doubt it.”

'Difficult to extrapolate anything meaningful'

Another off-payroll expert, Chris Mattingly, boss of IR35 Navigator said: “It's difficult to extrapolate anything meaningful from this research other than the notable absence of any findings on non-compliance.

“We know from the filed accounts of just five public sector organisations there were widespread failures in their ability to issue correct status determinations for their off-payroll workers during the research period, leading to over £254m in unpaid tax liabilities as a result.

“In all five cases, CEST had been used, so it would have been more useful for the research to examine how and why such significant errors had occurred. Perhaps HMRC did not want to draw attention to this.”

'Public sector wasn't well-prepared enough'

At Qdos, which runs IR35 contract reviews, its chief executive Mr Maley believes those departments who erred with IR35 are alluded to in the research.

“We’re told [in the report] that around half of public sector organisations didn’t use any information to ensure their compliance, whether from HMRC or third party specialists.

“This I can believe. The hundreds of millions in tax liability and penalties issued to government departments for non-compliance shows that the public sector wasn’t nearly well-prepared enough for IR35 reform.”

'CEST, the public sector's 'go-to''

And preparations may still be at an infantile stage, according to a compliance expert.

Reflecting after yesterday’s report, which states CEST is considered the “go-to” for IR35 assessing and quotes one interviewee fawning, ‘I don’t know how I would assess status without the HMRC tool,’ the expert, Andrew Webster, director at Workr Group took to LinkedIn to explain.

He posted: “A particular public sector body…[which an agency I know is hiring for] uses CEST, and has only a very soft-touch methodology to determine statuses for IR35 purposes. 

“It desperately needs a certain kind of [contractor] talent, but because it has not established a thorough process, it’s [simply] not getting the opportunity to have out of [IR35] scope statuses.
 
“[So] almost five years in…there is still a massive education gap in the public sector around the broader supply chain issues of IR35, and what ‘good’ looks like for methodology.”

'Role-based determinations save completing the whole assessment again'

Elsewhere online, reactions to the HMRC-backed research from contractors centre on why ‘blanketing’ hardly features, despite its prominence as a reaction pre and post-April 2017.

But one small section of the report suggests the Revenue’s clarification in July 2018 to make clear that role-based assessments are acceptable, may partly explain the near-omission.

“Role-based determinations were used where job roles, responsibilities and pay were well defined and applied across many contractors,” the research says.

“[For example] a finance professional had used the CEST tool for a previous contractor in an almost identical role and were [sic] therefore able to apply the same outcome without completing the whole assessment again.”

'Complex, mixed picture'

The HMRC research adds that 30 qualitive, follow-up interviews with the respondents also revealed that, apparently, it’s far from being all about IR35 in the public sector.

“[The] interviews illustrated a complex, mixed picture and provided evidence that changes to workforce structure were not always a direct response to the reforms,” IFF Research says.

“Other factors such as budget, recruitment drivers and new roles being created in the public sector also played a part in changes to workforce structures.”

'Should serve as a warning'

Last night, a source said the carefulness of the HMRC-commissioned research firm not to pin anything negative on the public sector IR35 rules, and to blame other factors if need be, was useful to a taxman who wants to go forward with the private sector rules in the fullest terms.

The source said: “This publication should serve as another warning to all those in the private sector -- including contractors and agencies -- to make sure they are prepared now.”