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What lessons can we learn from IR35 in the Public Sector?

Posted on 26/11/2018 by Eliza Mould

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Author: James Warren | European Managing Director 

The reformed IR35 tax legislation — designed to crack down on the number of ‘disguised employees’ in the UK and close the existing tax gap — has now been in operation for more than one year, and yet it is still making the headlines. Many feel that the IR35 reform was rushed and incomplete before being introduced to the public sector, sparking fears that similar problems may arise in the private sector.

There are lessons to be learned from IR35 in the public sector. Could they help to make the proposed introduction of the legislation into the private sector a much smoother, incident-free transition?

Determining Employee Status

Perhaps the most obvious issue arising from IR35 in the public sector is the confusion over what does — and what doesn’t — meet the criteria for a contract outside IR35. HMRC’s tool, the Check Employment Status Tool (CEST) has been a significant source of both concern and frustration since its launch. 

The tool, which overlooks one of the primary aspects determining employment status — specific mutuality of obligation — has been deemed ‘not fit for purpose’ by Lord Hall, Director General of the BBC, and has also been heavily criticised by the Institute of Chartered Accountants in England and Wales (ICAEW). In defence, HMRC claims that CEST provides a ‘reasonable guide’. However, according to Second Permanent Secretary Jim Harra, the tool is correct in just 85% of cases, leaving approximately 112,500 people that have used the tool to date with an incorrect status of employment.

The challenge of determining employee status, and using CEST, can be seen in the case of the Met Office, who used the tool to determine that one of their contractors was actually within IR35, although the contractor disagreed. Interestingly, at the Employment Tribunal, it was found that neither was correct and that the contractor was actually deemed to be self-employed. However, the lesson we can learn from this is that CEST decisions can be — and certainly are being — dismissed in a court of law.

Before the introduction of IR35 in the private sector, more needs to be done to ensure there are clear criteria for determining employment status, and that there are the right tools available to educate, support, and guide those that IR35 may affect: contractors, employees, and commercial employers. 

IR35 Responsibilities

By taking a look at IR35 in the public sector, it is clear that there are conflicting ideas on where responsibility lies. For example, a number of BBC presenters have received significant bills for unpaid taxes after being found to be working inside IR35, yet maintain that they were forced to work under a limited company by the BBC, therefore not receiving employee benefits such as pension or paid leave.

This can be seen in the case of Christa Ackroyd who previously presented BBC’s Look North. Ackroyd was found to be working inside IR35 for seven years while paying taxes in line with off-payroll working under her own company, Christa Ackroyd Media Ltd. Ackroyd was requested to repay £400,000 in unpaid taxes. 

Recently, there has been evidence of universities forcing contractors to work under umbrella companies as employees, to completely eradicate the need for the organisation to even consider IR35.

Over the next year, it is clear that more needs to be done to enforce the notion of ‘duty of care’, and ensure that the workforce continues to be diverse in terms of employment status. There are concerns that, if this is unable to happen, the future of the economy could be in jeopardy, resulting in massive skills shortages that could prevent businesses from taking development and innovation opportunities.

A Strong Sign?

Fortunately, there is already one lesson that seems to have been taken onboard: that both businesses and contractors need more time to prepare for the changes. Initially due to be implemented in April 2019, the roll out of IR35 to the private sector has now been delayed for 12 months. As announced in the Autumn Budget, it is now expected to come into effect in April 2020, with the reform applying only to medium and large businesses to prevent an unnecessary burden on the country’s small enterprises. 

While the exact reasons for the delay have not been made public, HMRC’s ‘Summary of Responses’ document cites that there are upcoming changes being considered before the extension of the legislation, including providing more in-depth information on the CEST landing page, and including mutuality of obligation within the tool. This delay has largely been welcomed, giving commercial businesses more time to ensure they are legally compliant. It also provides HMRC with an extended opportunity to ensure that they are giving the necessary (and correct) information on taxable earnings.

But is this really the strong sign we've been looking for? It really depends on how HMRC use their extra time. Over the next year, changes need to be made. While the public sector may have put up with the mess, the private sector will not. Already unsure of the future of the labour force thanks to the chaos of Brexit, private business owners are not going to roll over and let legislation which is 'not fit for purpose' dictate how they engage staff. Will we see even more delays in the future as private businesses rebel against IR35? Watch this space.